UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K / A
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended DECEMBER 31, 1997
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or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number: 0-21076
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FIRST SHENANGO BANCORP, INC.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1698967
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
FIRST FEDERAL PLAZA, 25 NORTH MILL STREET, P. O. BOX 671, NEW CASTLE, PA 16103
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(Address of principal executive offices) (Zip Code)
(724) 654-6606
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(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendments to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was $78,629,904 at February 28, 1998 based on the closing sales
price of $43.50 at February 28, 1998.
As of March 17, 1998, the Registrant had outstanding 2,069,007 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Part II -- Page 2 and pages 4 through 38 of the annual report to
shareholders for the year ended December 31, 1997.
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FORM 10-K INDEX
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PART 1 PAGE
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<S> <C> <C>
Item 1. Description of Business 1
Item 2. Description of Properties 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 17
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 17
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 17
PART III
Item 10. Directors and Executive Officers of the Registrant ^18
Item 11. Executive Compensation ^19
Item 12. Security Ownership of Certain Beneficial Owners and Management ^23
Item 13. Certain Relationships and Related Transactions ^23
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ^24
Signatures ^25
Exhibit Index ^26
Exhibits ^27
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FIRST SHENANGO BANCORP, INC. (THE "COMPANY") MAY FROM TIME TO TIME MAKE WRITTEN
OR ORAL "FORWARD-LOOKING STATMENTS", INCLUDING STATEMENTS CONTAINED IN THE
COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION (INCLUDING THIS
ANNUAL REPORT ON FORM 10-K AND THE EXHIBITS THERETO), IN ITS REPORTS TO
STOCKHOLDERS AND IN OTHER COMMUNICATIONS BY THE COMPANY, WHICH ARE MADE IN GOOD
FAITH BY THE COMPANY PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND
INTENTIONS, THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME
OF WHICH ARE BEYOND THE COMPANY'S CONTROL). THE FOLLOWING FACTORS, AMONG OTHERS,
COULD CAUSE THE COMPANY'S FINANCIAL PERFORMANCE TO DIFFER MATERIALLY FROM THE
PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL
AND THE STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE COMPANY CONDUCTS
OPERATIONS; THE EFFECTS OF, AND CHANGES IN, TRADE, MONETARY AND FISCAL POLICIES
AND LAWS, INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM, INFLATION, INTEREST RATE, ACCEPTANCE OF NEW PRODUCTS AND
SERVICES OF THE COMPANY AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS AND
SERVICES BY USERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO
SUBSTITUTE COMPETITORS' PRODUCTS AND SERVICES FOR THE COMPANY'S PRODUCTS AND
SERVICES; THE SUCCESS OF THE COMPANY IN GAINING REGULATORY APPROVAL OF ITS
PRODUCTS AND SERVICES, WHEN REQUIRED; THE IMPACT OF CHANGES IN FINANCIAL
SERVICES' LAWS AND REGULATIONS (INCLUDING LAWS CONCERNING TAXES, BANKING,
SECURITIES AND INSURANCE); TECHNOLOGICAL CHANGES; ACQUISITIONS; CHANGES IN
CONSUMER SPENDING AND SAVINGS HABITS; AND THE SUCCESS OF THE COMPANY AT MANAGING
THE RISKS INVOLVED IN THE FOREGOING.
THE COMPANY CAUTIONS THAT THE FOREGOING LIST OF IMPORTANT FACTORS IS NOT
EXCLUSIVE. THE COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING
STATEMENT, WHETHER WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME TO TIME OR ON
BEHALF OF THE COMPANY.
PART I
Item 1. Business
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The Holding Company. First Shenango Bancorp, Inc. is a unitary savings and loan
holding company that was incorporated in December 1992 under the laws of the
Commonwealth of Pennsylvania for the sole purpose of acquiring all of the issued
and outstanding common stock of First Federal Savings Bank of New Castle (the
"Savings Bank" or "First Federal"). This acquisition occurred in connection with
the simultaneous conversion on April 5, 1993 of First Federal from a mutual to a
stock institution.
On February 6, 1998, the Company entered into an Agreement of Affiliation and
Plan of Merger (the "Agreement") with FirstFederal Financial Services Corp.
("FFSW") of Wooster, Ohio. Under the terms of the Agreement, the Company will
merge with and into FFSW, with the Company's shareholders to receive 1.143
shares of FFSW common stock in exchange for each of their shares of the
Company's common stock. The transaction, which will be accounted for as a
pooling of interest, is subject to regulatory and shareholder approvals and is
expected to be completed in the third quarter of 1998.
The Savings Bank. First Federal Savings Bank of New Castle is a federally
chartered stock savings bank headquartered in New Castle, Pennsylvania, with
three branch offices located within the surrounding townships. The Savings Bank
was founded in 1887 as a Pennsylvania chartered association under the name of
New Castle Mutual Building and Loan Association, which merged with Equitable
Federal Savings and Loan Association of New Castle in 1940. Upon completion of
the 1993 conversion, First Federal changed its name to First Federal Savings
Bank of New Castle.
Since 1936, the Savings Bank's deposits have been federally insured by the
Savings Association Insurance Fund ("SAIF") and its predecessor, the Federal
Savings and Loan Insurance Corporation ("FSLIC"), and the Savings Bank has been
a member of the Federal Home Loan Bank System since 1933. The Savings Bank is a
community oriented, full service retail savings institution offering traditional
mortgage loan products. During recent years, the Savings Bank has expanded its
loan origination activities to include multi-family, commercial real estate,
consumer, and commercial business loans. At December 31, 1997 the Company had
total assets, deposits, and shareholders' equity of $374,972,000, $275,221,000
and $47,862,000, respectively.
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COMPETITION
The Company encounters substantial competition both in the attraction of
deposits and origination of real estate and other loans. Its most direct
competition for deposits has historically come from other savings associations
and commercial banks in the local market area, however, in recent years,
competition has increased significantly with credit unions, stock brokers and
mortgage banking companies and other financial service providers all competing
for the same customers. Due to their size, many of the Company's competitors
possess greater financial and marketing resources. Based on published figures,
the Company is the third largest financial institution headquartered in Lawrence
County on the basis of assets at December 31, 1997.
Competition for mortgage loans is not limited to local financial institutions.
The Company's market area has seen moderate unemployment and some population
decline. Because of the lack of economic growth and declining population, the
Company has had to invest in mortgage markets in surrounding counties and
purchase loans outside of its market area.
The Company competes for loans primarily through the interest rates and loan
fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers, and contractors. The Company competes for
deposits by offering a wide variety of deposit accounts at competitive rates,
convenient business hours, and four accessible office locations with interbranch
deposit and withdrawal privileges at each.
MARKET AREA
During its 111 year existence, the Savings Bank has focused on serving its
customers located in Lawrence County, Pennsylvania, which includes the city of
New Castle and the surrounding townships. The Savings Bank also serves customers
located in the neighboring Pennsylvania counties of Mercer, Beaver, Butler, and
Allegheny and the Ohio counties of Trumbull, Mahoning, and Columbiana. Together,
these Pennsylvania and Ohio counties are the primary marketing area for the
Company. Educational facilities, health care facilities, manufacturing, and
service industries are typical of the employer base in this area. The Company is
one of several local thrifts, local commercial banks, and regional commercial
banks serving this concentrated market.
This area was founded on manufacturing, which continues to play a major role in
the economy. Manufacturing employment in Lawrence County is supplemented by a
growing service sector. The largest service employers in Lawrence County are the
three hospitals; federal, state and local government; the local school districts
and Westminster College.
EMPLOYEES
As of December 31, 1997, the Company had 109 employees on its staff. These
employees are not represented by a collective bargaining agent or union, and the
Company believes it enjoys satisfactory relations with its personnel.
SUBSIDIARIES
The Savings Bank has one wholly owned subsidiary, Tri-State Service Corporation
("Tri-State"). Tri-State was incorporated in the Commonwealth of Pennsylvania in
May 1971 to engage in real estate development and sales, property management,
real estate rentals, mortgage lending, appraisal services and insurance
services. Tri-State, which has been dormant since 1986, holds a 10% ownership
interest in a 175 unit apartment complex from which it receives income.
Tri-State has an investment in the partnership of $22,000 at December 31, 1997.
REGULATION
General. As a federally chartered, SAIF-insured savings bank, the Savings Bank
is subject to extensive regulation by the Office of Thrift Supervision ("OTS")
and the Federal Deposit Insurance Corporation ("FDIC"). Lending activities and
other investments must comply with various federal statutory and regulatory
requirements. The Savings Bank is also subject to certain reserve requirements
promulgated by the Federal Reserve Board.
The OTS regularly examines the Savings Bank and prepares reports for
consideration by the Savings Bank's Board of Directors on any deficiencies that
they find in the Savings Bank's operations. The Savings Bank's relationship with
its depositors and borrowers is also regulated to a great extent by federal law,
especially in such matters as the ownership of savings accounts and the form and
content of the Savings Bank's mortgage documents.
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The Savings Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC or
Congress, could have a material adverse impact on the Company, the Savings Bank
and their operations. The Company is also required to file certain reports with,
and otherwise comply with, the rules and regulations of the Securities and
Exchange Commission ("SEC").
Set forth below is a brief description of certain laws which relate to the
regulation of the Savings Bank and the Company. The description does not purport
to be complete and is qualified in its entirety by reference to applicable laws
and regulations.
Insurance of Deposit Accounts. The Savings Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured account (as defined by law
and regulation). The FDIC charges an annual assessment for the insurance of
deposits based on the risk a particular institution poses to its deposit
insurance fund. This risk classification is based on an institution's capital
group and supervisory subgroup assignment. In addition, the FDIC is authorized
to increase such deposit insurance rates, on a semi-annual basis, if it
determines that such action is necessary to cause the balance in the SAIF to
reach the designated reserve ratio of 1.25% of SAIF-insured deposits within a
reasonable period of time.
On September 30, 1996, President Clinton signed the Deposit Insurance Funds Act
of 1996 ("DIFA") which included legislation to recapitalize the SAIF via a
special assessment on thrift industry deposits. As a result of DIFA, the Savings
Bank paid $1.67 million to the SAIF on November 27, 1996. DIFA also reduced the
Savings Bank's SAIF insurance fees from $0.23 per $100.00 (23 basis points)
annually to 0 basis points annually effective January 1, 1997. BIF and SAIF
insurance fees were set at a range of 0 to 27 basis points annually, and the
minimum annual FDIC assessment of $2,000 was eliminated. DIFA also mandated an
assessment on both BIF and SAIF insured institutions in order to meet the
obligations of the Financing Corporation ("FICO"). The annual BIF and SAIF
assessments were set at 1.296 basis points and 6.48 basis points, respectively.
As a result of the recapitalization of the SAIF during 1996, SAIF insured
institutions received a credit against their first quarter 1997 assessment for a
portion of their fourth quarter 1996 assessment. This credit amounted to
approximately $33,000 for the Savings Bank, and was recorded as a reduction of
1996 SAIF expense. The Savings Bank's federal deposit insurance premium expense
for the year ended December 31, 1996 amounted to approximately $2.23 million
including the special assessment, while the 1997 expense was $171,000.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to maintain Tier I Core Capital equal to at least 4% of the
institution's adjusted total assets and Tier I and Tier II Risk-based Capital
equal to at least 4% and 8%, respectively, of risk-weighted assets. At December
31, 1997, the Savings Bank exceeded all applicable regulatory requirements with
capital ratios of 10.42%, 19.00% and 20.25%, respectively. Management does not
anticipate difficulty in meeting the capital requirements in the future,
however, there can be no assurance that this will be the case.
Dividend and Other Capital Distribution Limitations. OTS regulations require the
Savings Bank to give the OTS advance notice within 30 days of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company. OTS
regulations impose limitations upon all capital distributions by savings
institutions, such as cash dividends, payments to repurchase or otherwise
acquire its shares, payments to shareholders of another institution in a
cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all capital requirements before and
after a proposed capital distribution ("Tier 1 institution") and has not been
advised by the OTS that it is in need of more than the normal supervision can,
after prior notice but without the approval of the OTS, make capital
distributions during a calendar year equal to the greater of (i) 100% of its net
income to date during the calendar year plus the amount that would reduce by
one-half its "surplus capital ratio" (the excess capital over its capital
requirements) at the beginning of the calendar year, or (ii) 75% of its net
income over the most recent four quarter period. Any additional capital
distributions require prior regulatory approval. As of December 31, 1997, the
Savings Bank was a Tier 1 institution. In the event the Savings Bank's capital
fell below its requirement or the OTS notified it that it was in need of more
than normal supervision, the Savings Bank's ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
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Qualified Thrift Lender Test. The Home Owners' Loan Act, as amended ("HOLA"),
requires savings institutions to meet a qualified thrift lender ("QTL") test. If
the Savings Bank maintains an appropriate level of Qualified Thrift Investments
("QTIs") (primarily residential mortgages and related investments, including
certain mortgage-related securities) and otherwise qualifies as a QTL, it will
continue to enjoy full borrowing privileges from the Federal Home Loan Bank
("FHLB") of which it is a member. The required percentage of QTIs is 65% of
portfolio assets (defined as total assets minus intangible assets, liquid
assets, investments in office premises and goodwill). Certain assets are subject
to a percentage limitation of 20% of portfolio assets. In addition, savings
institutions may include shares of stock of the FHLBs as qualifying QTIs.
Compliance with the QTL test is measured on a monthly basis in nine out of every
12 months. As of December 31, 1997, the Savings Bank was in compliance with its
QTL requirement with 76.99% of its assets invested in QTIs.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("EGRPRA"),
enacted in September 1996, further amended the QTL test and expanded thrift
lending authority. As a result, thrift institutions now have the option to be
qualified thrift lenders by either meeting the traditional QTL test or the
Internal Revenue Service's domestic building and loan tax code test. Small
business, educational and credit card loans are now includable without limit for
purposes of meeting the QTL test. Previously, small business loans were included
only if made in a credit-needy area, and educational and credit card loans were
included subject to a 10 percent of portfolio assets limit. Consumer loans
(other than credit card and educational loans) are now includable, along with
other specified loans and investments, up to 20 percent of portfolio assets. The
previous limit for consumer loans was 10 percent of portfolio assets.
A savings institution that does not meet a QTL test must either convert to a
bank charter or comply with the following restrictions on its operations: (i)
the savings institution may not engage in any new activity or make any new
investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the savings
institution shall be restricted to those of a national bank; (iii) the savings
institution shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the savings institution shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of three
years from the date the savings institution ceases to be a QTL, it must cease
any activity and not retain any investment not permissible for a national bank
and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
Loans to One Borrower. With respect to the dollar amount of loans that thrift
institutions may lend to a single or related group of borrowers, savings
institutions are subject, since 1989, to the same limits as those applicable to
national banks, which under current law have lending limits in an amount equal
to 15% of unimpaired capital and unimpaired surplus on an unsecured basis and an
additional amount equal to 10% of unimpaired capital and unimpaired surplus if
the loan is secured by readily marketable collateral. At December 31, 1997, the
Savings Bank's regulatory lending limit to one borrower was $6,442,000. Current
lending limits to one borrower may adversely affect the Savings Bank's ability
to conduct its operations, particularly its ability to make real estate
development and construction loans which typically carry large balances. The
Savings Bank's largest exposure to one borrower was $4,750,000 at December 31,
1997. This is not a single loan, but the aggregate amount of multiple loans,
commitments and letters of credit outstanding at that date.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit and community development needs of its entire community, including
low and moderate income neighborhoods. The CRA does not establish specific
lending requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the OTS, in connection with its examination of a savings
institution, to evaluate an institution's actual performance in three areas;
lending, investment and service. The CRA requires public disclosure of an
institution's CRA rating and requires the OTS to provide a written evaluation of
an institution's CRA performance utilizing a four tiered descriptive rating
system. The Savings Bank received a "satisfactory record of meeting community
credit needs" rating as a result of its last evaluation in April 1997.
The Savings Bank maintains a two tiered first time homebuyers mortgage loan
program. The purpose of the program is to provide assistance for those people
who desire to purchase their first home and to promote home ownership in
Lawrence County. Benefits include below market interest rates, loan to value
ratios of up to 95%, credit counseling, a home inspection and a waiver of
private mortgage insurance for low income borrowers. This program has been well
received, and there are no current plans to discontinue the program or limit the
funds which may be made available.
In August 1997, the first time homebuyers program was revised and presented to
the United Way of Lawrence County in a joint program with the City of New Castle
and the Lawrence County Family Center. This special program is available
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only for the purchase of homes obtained and renovated through the United Way.
Loan to value ratios of up to 100%, depending on the purchase price, are
available under this program.
Federal Home Loan Bank System. The Savings Bank is a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs that administer the home financing
credit function of savings institutions. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest-bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS. The Savings
Bank has historically met its reserve requirement via vault cash. Savings
institutions have authority to borrow from the Federal Reserve Bank "discount
window," but Federal Reserve policy generally requires savings institutions to
exhaust all FHLB sources before borrowing from the Federal Reserve System. The
Savings Bank had no borrowings from the Federal Reserve System at December 31,
1997.
General Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non- savings institution subsidiaries. This
regulation and oversight is intended primarily for the protection of the
depositors of the Savings Bank and not for the benefit of shareholders of the
Company.
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions, provided the Savings Bank satisfies the QTL
test. If the Company acquires control of another savings institution as a
separate subsidiary, it would become a multiple savings and loan holding
company, and the activities of the Company and any of its subsidiaries (other
than the Savings Bank or any other SAIF-insured savings institution) would
become subject to restrictions applicable to bank holding companies unless such
other institutions each also qualify as a QTL and were acquired in a supervisory
acquisition.
The Company must obtain approval from the OTS before acquiring control of any
other SAIF-insured institution. Such acquisitions are generally prohibited if
they result in a multiple savings and loan holding company controlling savings
institutions in more than one state. However, such interstate acquisitions are
permitted based on specific state authorization or in a supervisory acquisition
of a failing savings institution.
Federal law generally provides that no "person", acting directly or indirectly
or through or in concert with one or more other persons, may acquire "control",
as that term is defined in OTS regulations, of a federally insured savings
institution without giving at least 60 days written notice to the OTS and
providing the OTS an opportunity to disapprove the proposed acquisition. The
Federal Reserve Board may approve an application by a bank holding company to
acquire control of a savings institution. A bank holding company that controls a
savings institution may merge or consolidate the assets and liabilities of the
savings institution with, or transfer assets and liabilities to, any subsidiary
bank which is a member of the BIF with the approval of the appropriate federal
banking agency and the Federal Reserve Board. Federal savings institutions are
permitted to acquire or be acquired by any insured depository institution. As a
result of these provisions, there have been a number of acquisitions of savings
institutions by bank holding companies and other financial institutions in
recent years.
CLASSIFICATION OF ASSETS
OTS regulations provide for a classification system for problem assets of
insured institutions. Under this classification system, problem assets are
classified as "substandard", "doubtful", or "loss". An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets designated
"special mention" by management are assets included on the
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Company's internal watchlist because of potential weakness but which do not
currently warrant classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either substandard or
doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When an insured institution classifies problem assets
as "loss", it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge off such
amount. An institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the OTS,
which may order the establishment of additional general or specific loss
allowances.
A portion of general loss allowances established to cover possible losses
related to assets classified as substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
The following table provides further information in regard to the Company's
classified assets. There were no assets considered "special mention" at December
31, 1997.
At December 31, 1997
(In Thousands)
Classified assets: Gross Balance Specific Reserve Net Balance
-------------------------------------------------
Substandard (1) $5,392 $195 $5,197
Doubtful 120 66 54
Loss 68 68
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Total classified assets $5,580 $329 $5,251
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(1) Includes $1,116 of real estate owned and other repossessed assets.
GAP ANALYSIS
Because virtually all of the assets and liabilities of a financial institution
are monetary in nature, interest rates have a more significant impact on a
financial institution's performance than the effects of general levels of
inflation. A particular institution's exposure to the effects of changes in
interest rates may be measured by calculating its interest rate risk (IRR). One
measure of IRR is the interest rate sensitivity gap which attempts to determine
assets and liabilities which mature or reprice during specific time frames. An
institution may use this information to adjust the mix of its assets and
liabilities to reduce its potential exposure to the effects of changes in
interest rates.
A gap is considered to be positive when the amount of assets maturing or
repricing during a particular time period exceeds the amount of liabilities
maturing or repricing during that same time frame. Conversely, a gap is
considered to be negative when the amount of liabilities maturing or repricing
exceeds the amount of assets maturing or repricing. During a period of rising
interest rates, a negative gap would tend to adversely affect net interest
income, while a positive gap would tend to result in an increase in net interest
income. At December 31, 1997, the Company had a positive one year cumulative
interest rate sensitivity gap of 0.54%, compared to a negative one year gap of
6.06% at December 31, 1996 and a positive 9.17% at December 31, 1995.
As suggested by the change in these ratios from 1995 to 1996 and 1996 to 1997,
the structure of the Company's balance sheet changed significantly during 1996
and 1997. Relatively short-term FHLB borrowings were utilized during 1996 to
leverage the Company's high levels of capital and purchase longer term
investment securities, including tax-exempt municipal bonds and collateralized
mortgage obligations (CMOs), and to fund increased originations of mortgage and
commercial loans. The Company's exposure to IRR as measured by the interest rate
sensitivity gap changed during 1996 due to the mismatch between the short-term
repricing characteristics of the borrowings and the generally longer term
repricing characteristics of the investments and loans. During 1997, long-term
fixed rate mortgage-backed securities were sold and the proceeds used to repay
short-term borrowings. While this has reduced the Company's IRR, it has also
reduced net interest income due to the positive spread which was being earned.
Management monitors the Company's exposure to IRR on an ongoing basis and has
procedures in place to reduce this risk when real or anticipated changes in
financial markets dictate.
6
<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1997 which are expected
to reprice or mature in each of the future time periods shown. The Company's
analysis of its interest-rate sensitivity incorporates certain assumptions
published by the Office of Thrift Supervision ("OTS") concerning the
amortization of loans and other interest-earning assets and withdrawal of
deposits. Loans and mortgage-backed securities have assumed annual prepayment
rates of 9% to 37%. Decay rates for NOW accounts, money market accounts, and
savings accounts were established at 37%, 79% and 17%, respectively. These
assumptions may change over time based upon the current economic outlook;
however, the assumptions used by the OTS and the Company have not changed
significantly over the past three years. The interest rate sensitivity of the
Company's assets and liabilities illustrated in the following table would vary
substantially if different assumptions were used or if actual experience differs
from that indicated by such assumptions. Indeed, the actual experience of the
Company has been that during periods of increasing interest rates, net income
could be negatively affected because the Company's interest rate sensitive
liabilities would reprice faster than its interest rate sensitive assets,
causing a decline in the Company's interest rate spread and margin. This would
result from an increase in the Company's cost of funds that would not be
immediately offset by an increase in its yield on assets. As a result, the
following table has limited utility.
INTEREST-SENSITIVE ASSETS AND LIABILITIES
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Three Over One Over Five
Less than Months Through Through
Three Through Five Ten Over Ten
Months(1) One Year Years Years Years Total
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Residential mortgage loans:
Adjustable rate mortgage loans $ 6,900 $18,613 $ 11,709 $ 22 $ 8 $ 37,252
Non-performing 169 36 205
Fixed rate mortgage loans 4,102 14,228 54,137 33,564 26,064 132,095
Non-performing 4 34 251 289
-------------------------------------------------------------------------------------
Total gross residential mortgage
loans 11,002 33,014 65,882 33,620 26,323 169,841
Commercial and other real estate
loans 16,265 2,124 15,580 1,781 11,260 47,010
Non-performing 1,179 7 510 98 1,794
-------------------------------------------------------------------------------------
Total gross commercial and other
real estate 17,444 2,131 16,090 1,781 11,358 48,804
Consumer loans 12,460 10,458 15,913 1,262 20 40,113
Non-performing 81 28 374 483
-------------------------------------------------------------------------------------
Total gross consumer loans (3) 12,541 10,486 16,287 1,262 20 40,596
Investments (2) 16,653 8,157 3,300 30,447 58,557
Mortgage-backed securities 31,618 1,722 6,789 4,708 4,844 49,681
-------------------------------------------------------------------------------------
Total Interest-Earning Assets $89,258 $55,510 $105,048 $ 44,671 $ 72,992 $367,479
=====================================================================================
</TABLE>
7
<PAGE>
INTEREST-SENSITIVE ASSETS AND LIABILITIES (Continued)
(Dollar Amount in Thousands)
<TABLE>
<CAPTION>
Three Over One Over Five
Less than Months Through Through
Three Through Five Ten Over Ten
Months(1) One Year Years Years Years Total
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-Bearing Liabilities
NOW Deposits $ 2,937 $ 7,023 $ 11,554 $ 3,274 $ 2,128 $ 26,916
Savings deposits 2,566 7,005 23,951 11,996 10,633 56,151
Money Market deposits 6,701 9,689 3,370 833 153 20,746
Certificates of deposit 27,991 52,314 76,432 9,700 166,437
Borrowings 26,243 21,143 339 47,725
Advance payments by borrowers 70 193 731 467 415 1,876
-----------------------------------------------------------------------------------
Total Interest-Bearing Liabilities $66,508 $ 76,224 $ 137,181 $ 26,609 $ 13,329 $319,851
===================================================================================
Positive (negative) interest sensitivity
gap 22,750 (20,714) (32,133) 18,062 59,663 47,628
Cumulative interest sensitivity gap 22,750 2,036 (30,097) (12,035) 47,628
Ratio of interest-earning assets to
interest-bearing liabilities 134.21% 72.82% 76.58 % 167.88 % 547.62% 114.89%
Ratio of cumulative gap to total
assets 6.07% 0.54% (8.03)% (3.21)% 12.70%
</TABLE>
(1) Unearned fees and expenses on loans of $(821) are within this category.
(2) These amounts include assets available for sale and interest-bearing
deposits.
(3) These amounts include education loans held for sale.
LOANS
The Company has traditionally been a first mortgage residential lender; however,
during 1995 and 1996, management's strategy was to increase its commercial and
other real estate loan portfolio. For most of the past five years, single family
residential loans have comprised approximately 60% of the total loan portfolio,
however, this percentage increased to 66% at December 31, 1997. During that same
time frame, commercial and other real estate lending has increased as a
percentage of the portfolio from approximately 12% from 1992 through 1994 to
approximately 19% at December 31, 1997. Consumer lending as a percentage of the
total portfolio declined from approximately 28% from 1992 through 1995 to
approximately 15% at December 31, 1997. During 1996 and 1997, management reduced
its exposure to indirect automobile lending due to the relatively low
risk-adjusted yields available in the local market area, as well as increased
delinquencies and charge-offs in this part of the portfolio.
The Company's loan portfolio consists primarily of residential real estate loans
collateralized by single and multi-family residences, non-residential real
estate loans secured by commercial and retail properties and consumer loans
including indirect automobile loans and lines of credit.
Approximately 90% of the Company's lending activities are within 100 miles of
its headquarters in New Castle, Pennsylvania. This market encompasses western
Pennsylvania and eastern Ohio and is inclusive of the Pittsburgh market. The
ability of debtors to honor these contracts depends largely on economic
conditions affecting western Pennsylvania and eastern Ohio, with repayment risk
dependent on the cash flow of the individual debtors. Substantially all mortgage
loans are secured by real property with a loan amount of generally no more than
80% of the appraised value. Loans in excess of this amount require private
mortgage insurance in an amount sufficient to reduce the Company's exposure to
80% or less of the appraised value. Loans receivable are stated at unpaid
principal balances, less the allowance for loan losses, and net of deferred loan
origination fees and discounts. Loans available for sale are recorded at the
lower of the aggregate amortized cost or fair value.
8
<PAGE>
Composition of Loan Portfolio
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
December 31,
Amounts and Percentages of
Loans by Type: 1997 1996 1995 1994 1993
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family $168,643 66% $152,408 60% $126,642 55% $124,802 58% $115,346 57%
Construction 746 1,287 1,292 1% 1,560 1% 2,596 2%
----------------------------------------------------------------------------------------------
First mortgage residential
loans 169,389 66% 153,695 60% 127,934 56% 126,362 59% 117,942 59%
----------------------------------------------------------------------------------------------
Commercial and other real
estate 20,802 8% 23,363 9% 21,485 9% 17,683 8% 18,019 9%
Commercial business 19,370 8% 20,899 8% 13,448 6% 6,504 3% 5,253 3%
Land development 7,328 3% 3,472 2% 3,246 1% 3,020 1% 2,218 1%
----------------------------------------------------------------------------------------------
Commercial and other
real estate 47,500 19% 47,733 19% 38,179 16% 27,207 12% 25,490 13%
----------------------------------------------------------------------------------------------
Education (held
for sale) 3,424 1% 3,458 1% 3,587 2% 3,475 2% 6,357 3%
Automobile 17,185 7% 31,758 13% 42,927 19% 43,306 20% 36,697 18%
Other consumer 3,442 1% 3,681 1% 4,091 2% 4,153 2% 4,622 2%
Home equity 15,066 6% 15,445 6% 11,560 5% 10,783 5% 9,526 5%
----------------------------------------------------------------------------------------------
Consumer loans 39,117 15% 54,342 21% 62,165 28% 61,717 29% 57,202 28%
----------------------------------------------------------------------------------------------
Loans receivable, net $256,006 100% $255,770 100% $228,278 100% $215,286 100% $200,634 100%
==============================================================================================
</TABLE>
Origination, Purchase and Sale of Loans
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross loans receivable at beginning of year $258,637 $230,749 $217,986 $202,867 $176,402
-----------------------------------------------------------------------------
One-to-four family residential loans 35,072 45,022 16,475 28,529 21,901
Commercial and other real estate loans 11,457 1,620 8,046 2,083 5,632
Loan to facilitate the sale of REO 1,802
Construction loans 285 701 920 901 2,021
Consumer loans 10,589 23,797 28,957 34,269 29,949
Commercial business loans 9,604 24,272 15,293 7,840 3,421
-----------------------------------------------------------------------------
Total loans originated 67,007 95,412 69,691 73,622 64,726
-----------------------------------------------------------------------------
One-to-four family residential loans purchased 1,169 12,257
-----------------------------------------------------------------------------
Education loans sold (1,964) (1,905) (1,275) (3,555)
-----------------------------------------------------------------------------
Loan principal repayments (64,431) (64,300) (52,933) (53,873) (49,176)
Transfer from loans receivable to REO and
other repossessed assets (1,108) (1,296) (2,696) (1,009) (1,156)
Other, net (69) (23) (24) (66) (186)
-----------------------------------------------------------------------------
Net loan activity 604 27,888 12,763 15,119 26,465
-----------------------------------------------------------------------------
Gross loans receivable at end of year $259,241 $258,637 $230,749 $217,986 $202,867
=============================================================================
</TABLE>
Between 1990 and 1993, the Company on occasion purchased adjustable rate
mortgage ("ARM") loans from various banks, savings associations and mortgage
bankers throughout the eastern United States located in stable markets the
Company does not otherwise serve. The loans were purchased to supplement the
residential mortgage loan portfolio that reprices within one to three years. The
loans that were purchased were individually underwritten by management of the
Company and selected site visits were made by management to view the properties
for accuracy of appraisals. The loans purchased were
9
<PAGE>
primarily all one-to-four family, owner-occupied residential properties. The
Company primarily purchased whole loans but does not currently service most of
the loans. The loans purchased are without recourse. Any loan with a
loan-to-value ratio greater than 80% is covered by private mortgage insurance in
an amount sufficient to reduce the Company's exposure to 80% or less of the
appraised value. Since 1994, loan demand in the local market area has been
sufficient that loan purchases have not been necessary, however, the Company did
purchase $1.17 million in single family mortgage loans in 1997 as a part of its
CRA activities.
Since 1993, the Company has held its entire portfolio of education loans for
sale. These loans continue to be originated, with the intention of selling them
when the student graduates or otherwise leaves school. Gains of $34,000 were
recorded on education loan sales totalling $1,964,000 in 1997.
Residential Mortgage Loans
The Savings Bank currently offers bi-weekly fixed-rate mortgages, ARMs that
adjust every one or three years and have terms of up to 30 years, and fixed-rate
mortgage loans with terms of up to 30 years. The interest rates on ARMs adjust
based on treasury bill rates plus a specified margin. The Savings Bank considers
the market factors and competitive rates on loans as well as its own cost of
funds when determining the rates on the loans that it offers.
Commercial and Other Real Estate Loans.
Commercial real estate secured loans are originated in amounts up to 80% of the
appraised value of the property. Such appraised value is determined by an
independent appraiser previously approved by the Savings Bank. The Savings
Bank's commercial real estate loans are permanent loans secured by approved
property such as small office buildings, retail stores, small strip plazas, and
other non-residential buildings. The Savings Bank originates commercial real
estate loans with amortization periods of up to 30 years, primarily as
adjustable rate mortgages. Also included in this category of loans are
commercial business loans, commercial land development loans and land loans.
During 1995, the Savings Bank expanded its origination of commercial real estate
and business loans. Management has identified these types of lending as offering
superior growth prospects at attractive yields compared to other opportunities
currently available in the local market area. Management anticipates continuing
to pursue these types of loans as long as the risk-adjusted yields are superior
to other lending alternatives.
Consumer Loans
The Savings Bank views consumer lending as an important component of its
business operations because consumer loans generally have shorter terms and
higher yields or adjustable rates, thus reducing the Savings Bank's exposure to
changes in interest rates. In addition, the Savings Bank believes that offering
consumer loans helps to expand and create stronger ties to its customer base.
Consequently, the Company intends to continue its strategy of emphasizing
consumer lending. Consumer loan originations declined in 1997 and 1996 as a
result of management's decision to reduce its exposure to indirect automobile
lending due to the low risk-adjusted returns available in the local market area.
Regulations permit federally-chartered savings institutions to make secured and
unsecured consumer loans up to 35% of the Savings Bank's assets. In addition,
the Savings Bank has lending authority above the 35% limit for certain consumer
loans, such as home improvement loans and loans secured by deposit accounts.
Non-Performing Assets and Allowance for Loan Losses
The following table provides a five-year summary of non-performing assets which
are defined as loans accounted for on a non-accrual basis, accruing loans that
are contractually past due 90 days or more as to principal or interest payments,
real estate in foreclosure and other repossessed assets. All loans are reviewed
on a regular basis and are generally placed on a non-accrual status when the
loan becomes 90 days delinquent, and, in the opinion of management, the
collection of additional interest is doubtful. Loans which are past due 90 days
or more but still accruing interest are education loans on which the interest is
expected to be paid by the guarantor in the event of default. Interest accrued
and unpaid at the time the loan is placed on non-accrual status is charged
against interest income. The balances in the following table are as of December
31.
10
<PAGE>
Non-Performing Assets
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans receivable:
One-to-four family residential mortgage loans $ 421 $ 579 $ 201 $ 327 $ 752
Commercial and other real estate loans 1,868 11 295 1,787 1,968
Consumer loans 484 422 214 83 200
--------------------------------------------------------------
Total non-accrual loans 2,773 1,012 710 2,197 2,920
Total accruing loans which are contractually past due 90 days or
more (1) 1 1 2 18 92
--------------------------------------------------------------
Total non-accrual and accrual loans 90 days or more past due 2,774 1,013 712 2,215 3,012
REO and other repossessed assets 1,116 737 943 294 205
--------------------------------------------------------------
Total non-performing assets $3,890 $1,750 $1,655 $2,509 $3,217
==============================================================
Total non-performing loans to total loans receivable, net 1.08% 0.40% 0.31% 1.03% 1.50%
==============================================================
Total non-performing loans to total assets 0.74% 0.25% 0.21% 0.71% 1.01%
==============================================================
Total non-performing assets to total assets 1.04% 0.43% 0.50% 0.80% 1.08%
==============================================================
</TABLE>
(1) Education loans
The allowance for loan losses was established and is maintained by periodic
charges to the provision for loan loss, an operating expense, in order to
provide for losses inherent in any loan portfolio. Loan losses and recoveries
are charged or credited, respectively, to the allowance for loan losses as they
occur. The allowance for loan losses is determined by management considering
such factors as the size and character of the loan portfolio, loan loss
experience, problem and potential problem loans, and overall economic conditions
in its market area. The following table presents an analysis of the allowance
for loan losses.
11
<PAGE>
Analysis of the Allowance for Loan Losses
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total gross loans receivable $259,241 $258,637 $230,749 $217,986 $202,867
Average gross loans receivable $259,385 $245,004 $225,235 $209,437 $195,507
Allowance for loan losses at beginning of year $ 2,867 $ 2,472 $ 2,700 $ 2,233 $ 1,741
Loans charged off:
First mortgage residential loans (8)
Commercial and other real estate loans (36) (60) (856)
Consumer loans (411) (487) (327) (370) (325)
-----------------------------------------------------------------------
Total charge-offs (447) (547) (1,183) (370) (333)
Recoveries:
First mortgage residential loans 3
Consumer loans 42 44 37 48 2
-----------------------------------------------------------------------
Total recoveries 42 44 37 51 2
Net charge-offs (405) (503) (1,146) (319) (331)
Provision for estimated loan losses
First mortgage residential loans 120 10 (173)
Commercial and other real estate loans 246 300 585 539 434
Consumer loans 407 598 333 237 562
-----------------------------------------------------------------------
Total provision for estimated loan losses 773 898 918 786 823
Allowance for loan losses at end of year $3,235 $2,867 $2,472 $2,700 $2,233
=======================================================================
First mortgage residential loans $ 452 $ 332 $ 332 $ 332 $ 319
Commercial and other real estate loans 1,304 1,094 854 1,125 587
Consumer loans 1,479 1,441 1,286 1,243 1,327
-----------------------------------------------------------------------
Allowance for loan losses at end of year $3,235 $2,867 $2,472 $2,700 $2,233
=======================================================================
Net charge-offs to average loans (0.16%) (0.21%) (0.51%) (0.15%) (0.17%)
Allowance for loan loss to gross loans receivable 1.25% 1.11% 1.07% 1.24% 1.10%
Average allowance to average gross loans receivable 1.16% 1.07% 1.25% 1.15% 1.01%
</TABLE>
The entire allowance for loan losses is available to absorb any particular loan
loss.
12
<PAGE>
INVESTMENTS
The following table presents an analysis of the Company's investment portfolio.
Securities, Maturities and Yields
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Contractual Maturity Schedule
One Year or Less One to Five Years Five to Ten Years Over 10 Years
----------------------------------------------------------------------------------------
Carrying Carrying Carrying Carrying
Value Yield Value Yield Value Yield Value Yield
----------------------------------------------------------------------------------------
Available for sale:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and agency $1,009 7.58%
Collateralized mortgage obligations $41,902 7.22%
Municipal (1) 201 7.58% 30,946 8.54%
Other debt securities (2) $258 8.00%
Mortgage-backed securities 21 7.84% 1,424 7.68% 6,335 8.23%
FHLB Stock $ 2,574 6.38%
Other marketable equity securities(3) 9,989 6.00%
------------------------------------------------------------------------------------
$12,563 6.08% $279 7.99% $2,634 7.63% $79,183 7.82%
====================================================================================
</TABLE>
(1) The yields on municipal obligations have been computed on a tax-equivalent
basis.
(2) Consists of a State of Israel note.
(3) Consists of FNMA preferred stock and adjustable rate mutual funds of $2,090
and $7,899, respectively.
During 1997 and 1996 the Company utilized FHLB borrowings to purchase CMOs and
tax-exempt municipal securities. In management's opinion, the securities
represented the best investment alternatives available, considering the levels
of credit and interest rate risk that the Company was willing to accept. Due to
the long-term fixed rate nature of the municipal bonds purchased, they possess
relatively high levels of interest rate risk, which is offset by low credit risk
due to credit enhancement insurance purchased by the issuers resulting in the
highest credit ratings available from third party rating services, and
above-market taxable-equivalent yields. CMOs which the Company has purchased are
generally backed by mortgage-backed securities issued by either the Federal Home
Loan Mortgage Corporation ("FHLMC") or the Federal National Mortgage Corporation
("FNMA"), which are considered to have negligible credit risk. Investments in
CMOs are both floating and fixed rate. Floating rate CMOs reprice monthly based
on a published index plus specified margins, and thus have limited interest rate
risk. The fixed rate CMO which the Company has purchased has a stated maturity
of 30 years from the date of purchase but an anticipated weighted average life
of 3.6 years. However, significant changes in market interest rates from those
in effect at the time this security was purchased may result in this security
having an actual life either much less than or much greater than anticipated.
The Company's investment portfolio consisted of the following securities at
December 31 for the years indicated.
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
U.S. Government and agency $ 1,008,908 $ 9,612,800 $10,700,170
Collateralized mortgage obligations 41,901,739 45,865,881 17,855,765
Municipal 31,147,515 27,283,903 11,569,310
Other debt securities 258,125 261,563 258,125
Mortgage-backed securities 7,779,588 27,784,770 30,063,449
FHLB stock 2,574,200 4,289,800 1,442,200
Other marketable equity securities 9,988,673 10,190,045 8,697,582
--------------------------------------------
$94,658,748 $125,288,762 $80,586,601
============================================
</TABLE>
13
<PAGE>
The Company's investment portfolio includes an investment of $7,880,000 in the
Shay Adjustable Rate Mortgage Portfolio mutual fund which exceeds ten percent of
shareholders' equity at December 31, 1997. This mutual fund invests primarily in
mortgage-backed securities which reprice on current market indices, including
securities issued by the Federal Home Loan Mortgage Corporation, the Federal
National Mortgage Association, and other issuers. The investment portfolio also
includes four CMOs, listed in the table below, with values in excess of ten
percent of shareholders' equity at December 31, 1997. Due to the nature of the
securities which underly the mutual fund and the CMOs, these investments are
deemed by management to have limited credit risk.
<TABLE>
<CAPTION>
Market Value at
Issuer Description December 31, 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Residential Funding Mortgage Securities I, Inc. 1996--S3 A6 $14,024,000
Federal National Mortgage Association FNR 1993--61 F 10,355,000
Federal National Mortgage Association FNR 1996--58 F 5,000,000
Federal Home Loan Mortgage Corporation FHR 1889 F 5,000,000
</TABLE>
The Savings Bank invests in a portfolio of mortgage-backed securities which are
insured or guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC"),
the Federal National Mortgage Association ("FNMA") and the Government National
Mortgage Association ("GNMA"). Mortgage-backed securities increase the quality
of the Company's assets by virtue of the guarantees that back them, are more
liquid than individual mortgage loans, and may be used to collateralize
borrowings or other obligations of the Savings Bank.
As of December 31, 1997, the mortgage-backed securities portfolio totalled
$7,780,000 or 8.22% of the investment portfolio. Included in this amount are
adjustable rate mortgage-backed securities of $3,126,000 at December 31, 1997.
GNMA mortgage-backed securities are fully insured by the Federal Housing
Administration ("FHA") or partially guaranteed by the Veterans' Administration
("VA"). FHLMC mortgage-backed securities are participation certificates issued
and guaranteed by the FHLMC and secured by interests in pools of conventional
mortgages originated by approved lenders.
The Company holds all of its investment securities as available for sale in
order to provide maximum flexibility to respond to changes in interest rates or
other changes in its operating environment. During the year ended December 31,
1997, debt securities with fair values of $16,510,649 were sold resulting in
gross gains and losses of $59,946 and $77,202, respectively. During the year
ending December 31, 1996, debt and equity securities with fair values of
$29,679,214 were sold resulting in gross gains and losses of $246,513 and
$59,325, respectively. During the year ending December 31, 1995, debt and equity
securities with fair values of $26,759,420 were sold resulting in gross gains
and losses of $289,096 and $224,306, respectively.
SOURCES OF FUNDS
The Company's principal source of funds for use in lending and for other general
business purposes has traditionally been deposits obtained through the Savings
Bank's home and branch offices. The Company also derives funds from amortization
and prepayments of outstanding loans and mortgage-backed securities and from
maturing investment securities. When needed, the Company has the ability to
borrow funds from the FHLB of Pittsburgh and other sources to support
originations and purchases of loans and investment securities.
Deposits
Consumer and commercial deposits are attracted principally from within the
Company's primary market area through the offering of a broad selection of
deposit instruments including regular savings, money market, negotiable orders
of withdrawal ("NOW"), term certificate accounts (including negotiated jumbo
certificates in denominations of $100,000 or more), and individual retirement
accounts ("IRAs"). Deposit account terms vary according to the minimum balance
required, the time period the funds must remain on deposit and the interest
rate, among other factors. The Company does not obtain funds through brokers,
nor does it actively solicit funds outside the Commonwealth of Pennsylvania.
The interest rates paid by the Savings Bank on deposits can be set daily at the
discretion of management and are determined by evaluating the following factors:
the interest rates offered by other local financial institutions; the Company's
anticipated need for cash and the timing of that desired cash flow; the cost of
borrowing from other sources versus the cost of acquiring funds through customer
deposits; and the Company's anticipation of future economic conditions and
related interest rates.
14
<PAGE>
Maturities of jumbo certificate accounts of $100,000 or more (in thousands)
outstanding December 31,
Maturity Period: 1997 1996
--------------------------
Three months or less $5,400 $8,163
Over three months through six months 3,261 3,603
Over six months through twelve months 7,916 7,418
Over twelve months 10,039 8,986
--------------------------
$26,616 $28,170
==========================
BORROWINGS
Since 1994, the Savings Bank has from time to time borrowed from the FHLB and
utilized these funds for asset/liability management. Management anticipates
using this strategy in the future if sufficient interest rate spreads are
available. The following table sets forth information concerning the Savings
Bank's borrowings from the FHLB for the years ended December 31.
<TABLE>
<CAPTION>
(Dollar amounts in thousands) 1997 1996 1995
-----------------------------------------------------
<S> <C> <C> <C>
Average balance outstanding $75,622 $54,931 $15,407
Maximum amount outstanding at any month-end during the period $92,490 $85,794 $26,216
Average interest rate during the year 5.72% 5.66% 6.04%
Balance at December 31 $47,482 $85,794 $26,216
Weighted average interest rate at December 31 5.67% 6.06% 5.99%
</TABLE>
Rate/Volume Analysis of Changes in Interest Income and Interest Expense on a
Fully Taxable-Equivalent Basis
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
1997 vs. 1996 1996 vs. 1995
---------------------------------------- -------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Net Volume Rate Net
---------------------------------------- -------------------------------------
INTEREST INCOME
<S> <C> <C> <C> <C> <C> <C>
First mortgage residential loans $ 1,656 $ (74) $1,582 $1,033 $ 43 $1,076
Commercial and other real estate loans 564 (54) 510 1,022 94 1,116
Consumer loans (1,104) 98 (1,006) (365) 26 (339)
Interest-bearing deposits 165 (16) 149 156 (16) 140
Investment securities 814 292 1,106 1,766 148 1,914
Time deposits (14) (14)
---------------------------------------- -----------------------------------
TOTAL INTEREST-EARNING ASSETS $ 2,095 $ 246 $2,341 $3,598 $ 295 $3,893
======================================== ===================================
INTEREST EXPENSE
Money market and NOW deposits $ 161 $ 134 $ 295 $ 76 $ 116 $ 192
Savings deposits (97) 1 (96) (109) 1 (108)
Certificates of deposit 492 76 568 444 (356) 88
FHLB and other borrowings 1,162 63 1,225 2,266 (195) 2,071
Advance payments by borrowers for
taxes and insurance 7 4 11 (2) (2)
---------------------------------------- -----------------------------------
TOTAL INTEREST-BEARING LIABILITIES $ 1,725 $ 278 $2,003 $2,677 $(436) $2,241
======================================== ===================================
NET CHANGE IN INTEREST INCOME $ 370 $ (32) $ 338 $ 921 $ 731 $1,652
======================================== ===================================
</TABLE>
15
<PAGE>
Net Interest Income on a Fully Taxable-Equivalent Basis
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income per consolidated statement of income $29,560 $27,610 $23,787 $20,722 $20,725
Adjustment to fully taxable-equivalent basis 848 457 387 44 83
-----------------------------------------------
Adjusted interest income 30,408 28,067 24,174 20,766 20,808
Interest expense 16,962 14,960 12,719 10,685 11,490
-----------------------------------------------
Net interest income adjusted to a fully taxable-
equivalent basis $13,446 $13,107 $11,455 $10,081 $ 9,318
===============================================
</TABLE>
Item 2. Properties
- ------------------
Currently the Savings Bank operates from its main office located in the First
Federal Plaza at 25 North Mill Street, New Castle, Pennsylvania. The Savings
Bank owns this office facility which was opened in 1957 and has 50,000 square
feet. In addition to headquartering the Savings Bank's main office,
administrative staff and loan origination facilities, the Savings Bank rents
part of the First Federal Plaza to other professional and commercial tenants.
Due to the conditions of the local real estate market, the space rented to
others is at a net loss to the Savings Bank. The Savings Bank also owns an
approximately 12,000 square foot parking lot adjacent to First Federal Plaza.
The total investment in the property and equipment at First Federal Plaza is
$6,357,159 with a net book value of $3,216,535 at December 31, 1997.
Additional branch offices leased by the Savings Bank during 1997 are set forth
below with information regarding net book value of the premises and equipment at
such facilities at December 31, 1997.
<TABLE>
<CAPTION>
Total Date Net Book Value at
Location Investment Leased December 31, 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
3214 Wilmington Road
Neshannock Township, PA 16105 $876,012 11/1/72 $ 572,280
2090 West State Street
Union Township, PA 16101 941,135 2/25/97 868,255
2600 Ellwood Road
Shenango Township, PA 16101 964,794 5/9/90 473,956
-----------------
Total $ 1,914,491
=================
</TABLE>
Item 3. Legal Proceedings
- -------------------------
United States v. Pesses, et. al. The Savings Bank has a 10.38% interest in three
loans granted to the Lawrence County Industrial Development Authority ("the
Authority") secured by a first mortgage on real estate owned by the Authority.
The Authority leased the property to a third party, Metallurgical Company of
America, Inc. ("METCOA") and assigned its rights to receive the rents to the
lenders. METCOA defaulted on the lease payments and filed for bankruptcy in
1983, resulting in a cessation of mortgage payments. The lenders have not
commenced foreclosure proceedings on the real estate. It was subsequently
determined that METCOA processed toxic wastes at the site and that the site
contained hazardous materials.
In April of 1990, the United States of America, as the plaintiff, instituted
civil action in the United States District Court for the Western District of
Pennsylvania against METCOA, the principal owner, the Authority, record owner of
the real estate, and 24 other defendants alleged to be generators or
transporters of hazardous and low level material deposited at the site. The lead
lender, a local financial institution, was not named a defendant in this action
which seeks to establish joint and several liability for the recovery of costs
incurred and to be incurred in restoring the contaminated site. The plaintiff
asserted that costs in excess of $600,000 had been incurred by April, 1990.
Subsequently, Motorola Inc., an original defendant, filed a third party
complaint in the above action naming 33 third party defendants, including the
lead lender and the participants, including the Savings Bank. The complaint
alleges the third party defendants have positions and obligations identical to
Motorola and seeks either contribution or indemnification by the third party
defendants to Motorola in the event a judgement is entered against Motorola
assessing damages for clean-up and related damages which have been and may be
incurred with respect to the site.
A defense to these types of suits has been that lenders may only be found liable
when they control or otherwise effect control of the project as an owner or
operator. Management believes that the Savings Bank, as one of the lenders, is
not likely to be deemed an owner or operator of the site. While the ultimate
cost of site clean-up cannot be determined with any certainty,
16
<PAGE>
an estimate of $14,000,000 has been alleged. As a result of its evaluation of
the legal proceeding and its determination that the Savings Bank has not owned
or operated the site, it is management's opinion that the Savings Bank should
not be held liable for clean-up associated with the site. It is management's
intent to vigorously contest the allegations made against the Savings Bank. In
the event that liability for the clean-up costs is imposed on the lenders,
management believes that the ultimate liability imposed on the Savings Bank
should not have a material adverse effect on the Savings Bank's results of
operations or financial condition. The Savings Bank's loan balance totalling
approximately $49,000 was written off on September 28, 1987.
General. The Savings Bank, from time to time, is a party to ordinary routine
litigation, which arises in the normal course of business, such as claims to
enforce liens, condemnation proceedings on properties in which the Savings Bank
holds security interests, claims involving the making and servicing of real
property loans and other issues incident to the business of the Savings Bank. In
the opinion of management, the resolution of these lawsuits should not have a
material adverse effect on the financial condition or results of operations of
the Savings Bank or the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------------------
The information contained in the Company's Annual Report to Shareholders for the
fiscal year ended December 31, 1997 (the "Annual Report") on page 37 under the
heading "Analysis of Stock Activity and Dividend Information" is incorporated
herein by reference.
Item 6. Selected Financial Data
- -------------------------------
The information contained in the table captioned "Selected Consolidated
Financial and Other Data", on page 2 of the Annual Report is incorporated herein
by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
The information contained in the section captioned "Management's Discussion and
Analysis" on pages 4 - 10 of the Annual Report is incorporated herein by
reference.
Item 7A. Quantititative and Qualitative Disclosures about Market Risk
- ----------------------------------------------------------------------
The information contained in the section captioned "Management's Discussion and
Analysis - Asset and Liability Management" on pages 7-8 of the Annual Report is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
The Registrant's financial statements listed under Item 14 contained in the
Annual Report on pages 12 - 36 are incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
17
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
<TABLE>
<CAPTION>
Name Age (1) Year First Elected Director Term to Expire
- -------------------------------------- ------- --------------------------- --------------
BOARD NOMINEES FOR TERMS TO EXPIRE IN 2001
<S> <C> <C> <C>
Ronald P. Bergey . . . . . . . . 59 1984 1998
Robert H. Carlson . . . . . . . . . 70 1978 1998
DIRECTORS CONTINUING IN OFFICE
William G. Eckles, II................ 72 1966 1999
Dale R. Perelman..................... 55 1986 1999
Francis A. Bonadio................... 66 1985 2000
R. Joseph Hrach . . . . . . . . . . 49 1996 2000
Richard E. Rentz, Jr. . . . . . . . 54 1986 2000
</TABLE>
(1) at December 31, 1997.
The principal occupation during the past five years of each nominee and director
of the Company is set forth below.
Francis A. Bonadio has served as President and Chief Executive Officer
since 1985. He served as an officer of the Savings Bank from 1976-1985. Mr.
Bonadio is on the Board of Directors of the New Castle Community Y, the Jameson
Hospital and The Hoyt Institute of Fine Arts.
Ronald P. Bergey is a Certified Public Accountant and a Professor of
Accounting at Westminster College, New Wilmington, Pennsylvania. He also owns
and operates a part-time CPA practice in New Wilmington. Mr. Bergey is a member
of the Pennsylvania Institute of Certified Public Accountants and the American
Institute of Certified Public Accountants.
Robert H. Carlson is currently retired. Prior to 1990 he was President and
Chief Executive Officer of Universal- Rundle Corp., New Castle, Pennsylvania, a
plumbing-fixture manufacturer. Mr. Carlson retired from the Board of Directors
of the Ohio Edison Company and the Pennsylvania Power Company in 1996. He is
currently the Chairman of the Board of St. Francis Hospital in New Castle.
William G. Eckles, II was the President and Chief Executive Officer of W.G.
Eckles Co., New Castle, Pennsylvania, an architectural firm, from 1968 to 1986
and now serves as consultant to the company. Mr. Eckles serves on the Board of
Directors of the New Castle Community Y.
R. Joseph Hrach is the President of the Pennsylvania Power Company ("Penn
Power") in New Castle, Pennsylvania, a position he has held since July 1, 1996.
Previously he was a Division Manager of the Ohio Edison Company, the parent
company of Penn Power.
Dale R. Perelman is President, Chief Executive Officer and a minority
shareholder of King's Jewelry, New Castle, Pennsylvania. Mr. Perelman is a
founder of Leadership Lawrence County and immediate past president of the Retail
Jewelers of America.
Richard E. Rentz, Jr. is currently self employed as a computer consultant.
Mr. Rentz retired as publisher of the News Company, New Castle, Pennsylvania in
1991.
Executive Management
The following table sets forth certain information with respect to executive
officers of the Company who are not directors of the Company. There are no
arrangements or understandings between the Company and any person pursuant to
which such person has been appointed an executive officer. No executive officer
is related to any other executive officer or director of the Company by blood,
marriage or adoption. Officers of the Company are appointed annually by the
Board of Directors for one year terms.
18
<PAGE>
Lonny D. Robinson, CPA, 40, has served as Chief Financial Officer, Vice
President and Treasurer of the Company since January, 1993; Chief Financial
Officer of the Savings Bank since April, 1995; and Vice President and Treasurer
of the Savings Bank since February, 1988; joined the Savings Bank in December,
1984.
E. Waneata VanKirk, 58, has served as Secretary of the Company and the
Savings Bank since April, 1994; Assistant Secretary of the Company from April,
1993 to April, 1994; and Assistant Secretary of the Savings Bank from February,
1988 to April, 1994; joined the Savings Bank in October, 1963.
Item 11. Executive Compensation
- -------------------------------
Directors' Compensation
During 1997 each non-employee member of the Board of Directors of the
Savings Bank received an annual retainer fee of $3,000 plus a fee of $950 per
month and the Chairman of the Board received an additional fee of $100 per
month. No additional fees are paid for Board committee meetings. For the fiscal
year ended December 31, 1997, total fees paid to directors for Board meetings
and committee meetings were $87,600. No separate fees are paid for attendance at
Board or Board committee meetings of the Company. Additionally, directors
received awards of stock options and restricted stock in conjunction with the
Savings Bank's mutual-to-stock conversion in 1993.
During 1997, former Director J. Austin Murphy exercised stock options
covering 7,135 shares which resulted in net value realized (fair market value
less exercise price) of $89,188. Director Emeritus Albert J. Genkinger exercised
stock options covering 5,000 shares which resulted in net value realized of
$72,500.
Executive Compensation
The Company has no full time employees, relying upon employees of the
Savings Bank for the limited services required by the Company. All compensation
paid to directors, officers and employees is paid by the Savings Bank.
Summary Compensation Table. The following table sets forth the name of the
chief executive officer during the fiscal years ended December 31, 1997, 1996
and 1995. No other executive officer received cash compensation in excess of
$100,000 during the fiscal years ended December 31, 1997, 1996 or 1995.
<TABLE>
<CAPTION>
Long Term
Compensation
--------------------------------------
Annual Compensation Awards Payouts
- -------------------------------------------------------------------------- ------------------------------ -------
Securities
Restricted Underlying All Other
Name and Other Annual Stock Options/ LTIP Compensation
Principal Position Year Salary Bonus Compensation(1) Award(s)($) SARs(#) Payouts (2)
- ------------------- ---- ------ ----- --------------- ----------- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Francis A. Bonadio, 1997 $144,000 $52,640 $ -0- $ -0- -0- $-0- $55,632
President and CEO 1996 $140,000 $43,550 $ -0- $ -0- -0- $-0- $63,941
1995 $134,000 $36,180 $ -0- $ -0- -0- $-0- $67,442
</TABLE>
- ------------------------
(1) Does not include the value of certain other benefits, such as pension plans
and club membership, which do not exceed 10% of the total salary and bonus
of the named executive.
(2) Indicates employer contributions to the Savings Bank's 401(K) Profit
Sharing Plan of $3,196, $3,289, and $3,394 for 1997, 1996 and 1995,
respectively. Represents value of 1,114 shares, 1,367 and 1,511 shares
allocated under the ESOP in 1997, 1996 and 1995 based upon the market price
of $37.00, $22.50 and $20.50 as of December 31, 1997, 1996 and 1995,
respectively. Includes premiums paid on life insurance policy for the
benefit of Mr. Bonadio of $1,188, $1,132 and $675 for 1997, 1996 and 1995,
respectively. Also includes amounts accrued for the Supplemental Executive
Retirement Plan of $10,030, $28,997 and $32,389 for 1997, 1996 and 1995,
respectively.
Board Compensation Committee Report on Executive Compensation
- -------------------------------------------------------------
The Company's Compensation Committee met once during the fiscal year ended
December 31, 1997 to review compensation paid to executive officers and to
determine the level of any increases in the salary budget for executive officers
to take effect during the following year. The committee reviews various
published surveys of compensation paid to executives performing similar duties
for depository institutions and their holding companies, with a particular focus
on the level of compensation paid by comparable institutions in and around the
Savings Bank's market area, including institutions with total assets of between
$200 million and $500 million. Although the committee does not set compensation
levels for executive officers based on whether particular financial goals have
been achieved by the Company, the committee does consider the overall
profitability of the Company when making these decisions. With respect to each
particular executive officer, his or her contributions to the Company over the
past year are also evaluated. For the fiscal year ended December 31, 1997,
Francis A. Bonadio, President and Chief Executive Officer, received an increase
in salary from $140,000 to $144,000, as disclosed in the Summary Compensation
Table.
19
<PAGE>
Compensation Committee
Robert H. Carlson, Chairman
William G. Eckles, II
Richard E. Rentz, Jr.
Stock Option Plan. In connection with the Savings Bank's conversion from
mutual to stock form in April 1993 (the "Conversion") and acquisition of the
outstanding stock of the Savings Bank by the Company, (the "Reorganization"),
the Company's Board of Directors adopted the First Shenango Bancorp, Inc. 1993
Stock Option Plan (the "Option Plan"), which was ratified by shareholders of the
Company at the August 1993 meeting of shareholders. Pursuant to the Option Plan,
224,825 shares of Common Stock are reserved for issuance upon exercise of stock
options granted or to be granted to officers, directors and key employees of the
Company and its subsidiaries from time to time. The purpose of the Option Plan
is to provide additional incentive to certain officers, directors and key
employees by facilitating their purchase of a stock interest in the Company. The
Option Plan, which became effective upon the Reorganization, provides for a term
of ten years, after which no awards may be made, unless earlier terminated by
the Board of Directors pursuant to the Option Plan.
The following table sets forth additional information concerning options granted
under the 1993 Stock Option Plan.
<TABLE>
<CAPTION>
OPTION/SAR EXERCISES AND YEAR END VALUE TABLE
Aggregated Option/SAR Exercises in Last Fiscal Year, and FY-End Option/SAR Value
--------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Options/SARs Options\SARs
at FY-End (#) at FY-End ($)(1)
------------- ----------------
Shares Acquired
Name on Exercise (#) Value Realized ($)(1) Exercisable (2)/Unexercisable Exercisable/Unexercisable
- ---- --------------- --------------------- ----------------------------- -------------------------
<S> <C> <C> <C> <C>
Francis A. Bonadio -0- -0- 28,103/0 $758,781/$0
</TABLE>
- -----------------
(1) Based upon the closing price of the stock as of December 31, 1997, of
$37.00 per share.
(2) Exercisable within 60 days of Voting Record Date.
Management and Directors Stock Bonus Plans. The Board of Directors of the
Savings Bank has adopted two stock bonus plans (the "Management Stock Bonus
Plan" and the "Directors Stock Bonus Plan", collectively, the "Stock Bonus
Plans" or the "MSBPs") as a method of providing directors, officers, and key
employees of the Savings Bank with a proprietary interest in the Company in a
manner designed to encourage such persons to remain in the employment or service
of the Savings Bank. The Savings Bank has contributed sufficient funds to the
MSBP Trusts which enabled the MSBP Trusts to purchase Common Stock representing
3.85% of the aggregate number of shares issued in the Conversion (i.e., 89,930
shares of Common Stock). Awards under the MSBPs were made in recognition of
prior and expected future services to the Savings Bank of its directors and
executive officers responsible for implementation of the policies adopted by the
Board of Directors, the profitable operation of the Savings Bank, and as a means
of providing a further retention incentive and direct link between compensation
and the profitability of the Savings Bank.
Pension Plan. The Savings Bank sponsors a tax-qualified defined benefit
pension plan (the "Pension Plan"). All full-time employees of the Savings Bank
are eligible to participate after one year of service and attainment of age 21.
A qualifying employee becomes fully vested in the Pension Plan upon completion
of five years of service. The Pension Plan is intended to comply with the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Total
Savings Bank pension expense for the fiscal years ended December 31, 1997, 1996
and 1995 amounted to $0, $0, and $48,637, respectively.
The Pension Plan provides for monthly payments to each participating
employee at normal retirement age (age 65). The annual benefits payable under
the Pension Plan are equal to 1.25% of Final Average Compensation ("FAC") as
defined in the pension plan, excluding overtime, commission and bonus pay
multiplied by years of service. A participant may elect an early retirement at
age 55 with 10 years of service, and may elect to receive a reduced monthly
benefit. The Pension Plan also provides for payments in the event of disability
or death. At December 31, 1997, Mr. Bonadio had 21 years of credited service
under the Pension Plan.
Benefits are payable in the form of various annuity alternatives, including
a joint and survivor option, or in a lump-sum amount. The following table shows
the estimated annual benefits payable under the Pension Plan based on the
respective employee's years of credited service and applicable average annual
salary as calculated under the Pension Plan. For the Pension Plan year ended
June 30, 1997, the highest permissible annual benefit under the Internal Revenue
Code ("Code") is $125,000, as indexed. Benefits under the Pension Plan are not
subject to offset for Social Security benefits.
20
<PAGE>
Years of Credited Service
----------------------------------------------------------------
Salary 15 20 25 30 35
- ------ ------- ------- ------- ------- -------
$ 20,000....... $ 3,750 $ 5,000 $ 6,250 $ 7,500 $ 8,750
40,000....... 7,500 10,000 12,500 15,000 17,500
60,000....... 11,250 15,000 18,750 22,500 26,250
80,000....... 15,000 20,000 25,000 30,000 35,000
100,000....... 18,750 25,000 31,250 37,500 43,750
120,000....... 22,500 30,000 37,500 45,000 52,500
150,000....... 28,125 37,500 46,875 56,250 65,625
401(k) Profit Sharing Plan. The Savings Bank sponsors a tax-qualified
defined contribution profit sharing plan, ("401(k) Plan"), for the benefit of
its employees. Employees become eligible to participate under the Plan after age
18 and completing one year of service. Under the 401(k) Plan, employees may
voluntarily elect to defer up to 9% of compensation, not to exceed applicable
limits under the Code (i.e., $9,500 in 1997). The first 4% of employee savings
is matched by a company contribution of $.50 for each $1.00 of employee
contribution. Such matching contributions shall be 100% vested following
completion of three years of service. Additionally, the Savings Bank may
contribute an annual discretionary contribution to the plan. Such benefits are
allocated to participant accounts as a percentage of base compensation of such
participant to the base compensation of all participants. Total contributions to
the 401(k) Plan by the Savings Bank for all employees for the fiscal years ended
December 31, 1997, 1996, and 1995 were $28,793, $24,089, and $21,436,
respectively.
Employee Stock Ownership Plan. The Savings Bank has established an employee
stock ownership plan, (the "ESOP"), for the exclusive benefit of participating
employees. Participating employees are employees who have completed one year of
service with the Savings Bank or its subsidiaries and attained age 21. The ESOP
is to be funded by contributions made by the Savings Bank in cash or Common
Stock. Benefits may be paid either in shares of Common Stock or in cash. The
ESOP borrowed funds from the Company with which to acquire 112,412 shares, or
4.81% of the shares issued in the Conversion. At February 28, 1998, the ESOP
held 106,508 shares, or 5.15% of the shares issued and outstanding at that date.
Shares purchased with such loan proceeds are held in a suspense account for
allocation among participants as the loan is repaid. The Savings Bank
anticipates contributing approximately $112,412 annually to the ESOP to meet
principal obligations under the ESOP loan, plus applicable interest payments.
This loan is expected to be fully repaid in approximately ten years. The Savings
Bank contributed $173,881 to the ESOP for the fiscal year ended December 31,
1997.
The Board of Directors has appointed a committee (the "ESOP Committee") and
a board of trustees (the "ESOP Trustees") to administer the ESOP. The ESOP
Committee consists of Directors Eckles, Hrach and Rentz, as does the board of
trustees. The Board of Directors or the ESOP Committee may instruct the ESOP
Trustees regarding investment of funds contributed to the ESOP. The ESOP
Trustees must vote all shares allocated to participant accounts held under the
ESOP in accordance with the instructions of the participating employees.
Unallocated shares and allocated shares for which no timely direction is
received will be voted by the ESOP Trustees as directed by the Board of
Directors or the ESOP Committee, subject to the ESOP Trustees' fiduciary duties.
Supplemental Executive Retirement Plan. The Savings Bank has implemented a
supplemental executive retirement plan ("SERP") for the benefit of Mr. Francis
A. Bonadio, President. The purpose of the SERP is to furnish Mr. Bonadio with
supplemental post-retirement benefits in addition to those which will be
provided under the Savings Bank's Pension Plan and other retirement benefits. It
is anticipated that benefits payable under the SERP will equal approximately
$1,000 per month upon retirement at age 65 for a minimum of 120 months. Payments
under the SERP are being accrued for financial reporting purposes during the
period of Mr. Bonadio's employment. The SERP is unfunded. All benefits payable
under the SERP will be paid from current assets of the Savings Bank. There are
no tax consequences to either Mr. Bonadio or the Savings Bank related to the
SERP prior to payment of benefits. Upon receipt of payment of benefits, Mr.
Bonadio will recognize taxable ordinary income in the amount of such payments
received and the Savings Bank will be entitled to recognize a tax-deductible
compensation expense at that time. The Company's expenses for 1997, 1996 and
1995 were $10,030, $28,997, and $32,389 offset by deferred taxes of
approximately $10,000, $11,000, and $11,000, respectively.
Long Term Incentive Plans
The Company does not sponsor any long term incentive plans and made no
awards or payments under any such plans during the fiscal year ended December
31, 1997.
21
<PAGE>
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Company and Savings Bank consists of
Robert H. Carlson, Chairman, William G. Eckles, II and Richard E. Rentz, Jr. The
committee, which consists of non-employee directors of the Company and Savings
Bank, meets annually to review the performance of the Savings Bank's officers
and employees, and to determine compensation programs and salary actions for the
Savings Bank and its personnel.
Mr. Carlson's son has outstanding from the Savings Bank a mortgage loan
with a 7.375% interest rate. This loan had a balance of $133,551 on December 31,
1997 and the highest balance during 1997 was $137,014. Additional information
concerning this loan is provided under "Certain Transactions with Management and
Others" in Item 13.
Performance Graph
The following performance graph is for the period from April 6, 1993 (the
first day of trading for the Company's stock) through December 31, 1997. The
performance graph compares the cumulative total shareholder return on the
Company's Common Stock with (a) the cumulative total shareholder return on
stocks included in the Nasdaq CRSP U.S. index and (b) the cumulative total
shareholder return on stocks included in the Nasdaq CRSP Bank index prepared for
Nasdaq by the Center for Research of Securities Prices (CRSP) at the University
of Chicago. Comparison of the Common Stock with the Nasdaq stock market and bank
indices assumes the investment of $1,000 as of the close of trading on April 6,
1993. The cumulative total return for the Company is computed assuming the
reinvestment of dividends at the frequency with which dividends were paid during
the period.
There can be no assurance that the Company's future stock performance will
be the same or similar to the historical stock performance shown in the graph
below. The Company will neither make nor endorse any predictions as to stock
performance.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
4/6/93 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Nasdaq CRSP U.S. 1,000.00 1,171.83 1,145.47 1,619.99 1,992.54 2,445.07
Nasdaq CRSP Bank 1,000.00 1,037.26 1,033.48 1,539.14 2,032.02 3,432.88
First Shenango Bancorp, Inc. 1,000.00 1,020.80 936.49 1,425.05 1,597.81 2,681.82
</TABLE>
22
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
Shares of Common Stock % of
Name Beneficially Owned(1)(2)(3)(4) Class
- --------------------------- ------------------------------ ------
Ronald P. Bergey 20,634 0.95%
Robert H. Carlson 26,917(8) 1.24
William G. Eckles, II 24,062(5)(6) 1.11
Dale R. Perelman 27,956(7) 1.29
Francis A. Bonadio 74,004(9) 3.42
R. Joseph Hrach 5,100(5)(10) 0.24
Richard E. Rentz, Jr. 28,267(5) 1.30
All executive officers and directors
as a group (9 persons) 241,888(5) 11.17%
(1) At February 28, 1998.
(2) Pursuant to rules promulgated under the 1934 Act, a person or entity is
considered to beneficially own shares of Common Stock if he or she
directly or indirectly has or shares (1) voting power, which includes the
power to vote or to direct the voting of the shares; or (2) investment
power, which includes the power to dispose or direct the disposition of
the shares. Unless otherwise indicated, includes all shares held directly
by the named individuals as well as by spouses, minor children in trust
and other indirect ownership, over which shares the named individual
effectively exercises sole voting and investment power.
(3) Includes 11,873 restricted shares awarded to Mr. Bonadio and 2,710
restricted shares granted to each non-employee director pursuant to the
Management and Directors Stock Bonus Plans. These shares were granted in
connection with the Savings Bank's Conversion from mutual to stock form
on April 5, 1993 and became fully vested on April 5, 1997. Mr. Hrach did
not become a Director until 1996 and thus did not receive such an award.
(4) Includes shares of Common Stock subject to options granted pursuant to
the 1993 Stock Option Plan for which options are exercisable within 60
days of the Voting Record Date.
(5) Excludes 106,508 shares of Common Stock (5.15%) held by the ESOP of the
Savings Bank for which such non-employee directors (Directors Eckles,
Hrach and Rentz) serve as plan trustees and exercise shared voting and
investment power. Shares which are unallocated to participating employees
(presently 55,129 shares) and shares for which no voting directions are
received are voted by the plan trustees. Once allocated to participant
accounts, such Common Stock will be voted by the plan trustees as
directed by each plan participant as the beneficial owner of such Common
Stock. The plan trustees act as fiduciaries within the meaning of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA").
The individuals serving as plan trustees disclaim beneficial ownership of
stock held under the ESOP.
(6) Includes 5,000 shares held in trust by a self-directed IRA account, 2,000
shares held directly by spouse, and 2,570 shares held jointly by spouse,
son and daughter.
(7) Includes 10,726 shares held jointly with spouse, and 108 shares held
directly by spouse.
(8) Includes 8,650 shares held in trust by a self-directed IRA account.
(9) Includes 10,000 shares held jointly with spouse, 3,200 shares held
directly by spouse, 2,035 shares held directly by sons, and 6,919 shares
allocated under the ESOP.
(10) Includes 100 shares held jointly with spouse.
Management of the Registrant knows of no arrangements, including any pledge by
any person of securities of the Registrant, the operation of which may at a
subsequent date result in a change in control of the Registrant.
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
Certain Transactions with Management and Others
The Savings Bank, like many financial institutions, has followed a
policy of granting various types of loans to officers, directors and employees.
The loans have been made in the ordinary course of business and on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with the Savings Bank's other customers,
and do not involve more than the normal risk of collectibility, nor present
other unfavorable features. All loans by the Savings Bank to its directors and
executive officers are subject to regulations of the Office of Thrift
Supervision ("OTS") restricting loans and other transactions with affiliated
persons of the Savings Bank. Prior to the enactment of the Financial
Institutions Reform, Recovery and Enforcement Act ("FIRREA"), the Savings Bank
provided loans to officers and directors and other affiliates at
23
<PAGE>
reduced interest rates and fees. The preferential rate on mortgage loans could
be no less than the greater of (i) the Savings Bank's cost of funds plus 100
basis points or (ii) the Internal Revenue Service's applicable federal rate. In
addition, the Savings Bank routinely waived its points and application fees for
affiliate loans. Effective August 9, 1989, FIRREA required that all such loans
be made on terms and conditions comparable to those for similar transactions
with non-affiliates. The Savings Bank's affiliates must now qualify for any
loans on the same terms and conditions that apply to other customers.
Furthermore, loans to an affiliate must be approved in advance by a
disinterested majority of the Board of Directors or be within other guidelines
established as a result of OTS regulations. Loans to executive officers and
directors of the Savings Bank, and their affiliates aggregating $60,000 or more
during the twelve months ended December 31, 1997, amounted to $435,639, or 1.58%
of the Savings Bank's retained earnings at December 31, 1997.
The following table sets forth the indebtedness of executive officers,
directors, and members of the immediate family of an executive officer or
director who are or were indebted to the Savings Bank at any time during the
fiscal year ended December 31, 1997 in an amount in excess of $60,000 that was
originated prior to August 9, 1989.
<TABLE>
<CAPTION>
Highest
Loan Prevailing Balance
Interest Market Rate During Year Balance
Type of Origination Original Rate at at Ended at
Name Affiliation Loan Date Balance 12/31/97 Origination 12/31/97 12/31/97
------ ----------- ------ ------ ------- --------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert H. Carlson (1) Mortgage 03/03/88 $154,000 7.375% (2) 8.50% $137,014 $133,551
</TABLE>
- --------------------------------
(1) Son of Director Robert H. Carlson.
(2) This loan is a variable rate mortgage with an initial interest rate of 8.00%
The common stock of the Company is registered pursuant to Section 12(g) of the
Securities and Exchange Act of 1934, as amended ("Exchange Act"). Executive
officers and directors of the Company and beneficial owners of greater than 10%
of the Company's common stock ("10% beneficial owners") are required to file
reports on Forms 3, 4, and 5 with the Securities and Exchange Commission
disclosing changes in beneficial ownership of the Common Stock. Based on the
Company's review of Forms 3, 4, and 5 filed by officers, directors and 10%
beneficial owners of common stock, no executive officer, director, or 10%
beneficial owner of common stock failed to file such ownership reports on a
timely basis during the fiscal year ended December 31, 1997.
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- ------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. The following financial statements and the report of the independent
auditors of the Registrant included in the Registrant's 1997 Annual
Report to Shareholders are incorporated herein by reference and also
in Item 8 hereof.
Independent Auditor's Report, page 11.
Consolidated Statements of Financial Position as of December 31, 1997 and
1996, page 12.
Consolidated Statements of Income for the Years Ended December 31, 1997,
1996 and 1995, page 13.
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 1997, 1996 and 1995, page 14.
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995, page 15 - 16.
Notes to Consolidated Financial Statements, on pages 17 - 36.
2. Financial Statement Schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission ("SEC"), except as filed as an exhibit to this report, are
not required under the related instructions or are included in notes
to the consolidated financial statements incorporated herein by
reference and therefore have been omitted.
3. The exhibits listed on the exhibit index on page 20 of this Form 10-K
are filed herewith or are incorporated herein by reference from a
previous filing.
(b) Reports on Form 8-K filed in the fourth quarter of 1997: None.
(c) The exhibits listed on the exhibit index on page 20 of this Form 10-K are
filed herewith or are incorporated herein by reference from a previous
filing.
(d) There are no other financial statements and financial statement schedules
which were excluded from the Annual Report to Shareholders which are
required to be included herein.
24
<PAGE>
FIRST SHENANGO BANCORP, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRST SHENANGO BANCORP, INC.
April 28, 1998 By: /s/ Francis A. Bonadio
---------------------------------------------
Francis A. Bonadio
President, Chief Executive Officer and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title
---------- -----
<S> <C> <C>
President, Chief Executive Officer, and
Director
/s/ Francis A. Bonadio (Principal Executive Officer) 4/28/98
- ---------------------------------------------------------
Francis A. Bonadio
Chief Financial and Accounting Officer
/s/ Lonny D. Robinson (Principal Financial and Accounting Officer) 4/28/98
- ---------------------------------------------------------
Lonny D. Robinson
/s/ Robert H. Carlson Director 4/28/98
- ---------------------------------------------------------
Robert H. Carlson
/s/ Ronald P. Bergey Director 4/28/98
- ---------------------------------------------------------
Ronald P. Bergey
/s/ William G. Eckles, II Director 4/28/98
- ---------------------------------------------------------
William G. Eckles, II
/s/ R. Joseph Hrach Director 4/28/98
- ---------------------------------------------------------
R. Joseph Hrach
/s/ Dale R. Perelman Director 4/28/98
- ---------------------------------------------------------
Dale R. Perelman
/s/ Richard E. Rentz, Jr. Director 4/28/98
- ---------------------------------------------------------
Richard E. Rentz, Jr.
25
</TABLE>
<PAGE>
EXHIBIT INDEX
-------------
Number Description
- ------ -----------
2 Agreement of Affiliation and Plan of Merger by and
between FirstFederal Financial Services Corp and
First Shenango Bancorp, Inc. dated February 6, 1998 *
3 (i) Articles of Incorporation of the Registrant **
3 (ii) Bylaws of the Registrant ***
10.1 1993 Stock Option Plan of the Registrant ****
10.2 Management Stock Bonus Plan and Trust Agreement of
the Registrant *****
10.3 Supplemental Executive Retirement Plan of Francis A.
Bonadio ******
10.4 Change of Control Severance Agreement of Lonny D.
Robinson
13 Annual Report to Shareholders for the fiscal year
ended December 31, 1997.
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
* Incorporated by reference from Current Report on Form
8-K dated February 25, 1998.
** Incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form S-1 (File No. 33-
55962) filed on December 18, 1992.
*** Incorporated by reference to Exhibit 3ii to the
Quarterly Report on Form 10Q (File No. 0-21076) for
the quarter ended March 31, 1996.
**** Incorporated by reference to Exhibit A to the proxy
statement dated June 28, 1993, for a special meeting
of stockholders.
***** Incorporated by reference to Exhibit B to the proxy
statement dated June 28, 1993, for a special meeting
of stockholders.
****** Incorporated by reference to Exhibit 10.3 to the
Annual Report on Form 10-K for the fiscal year ended
December 31, 1993.
26
EXHIBIT 10.4
CHANGE OF CONTROL SEVERANCE AGREEMENT OF LONNY D. ROBINSON
<PAGE>
CHANGE IN CONTROL SEVERANCE AGREEMENT
-------------------------------------
LONNY D. ROBINSON
-----------------
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT ("Agreement") entered into
this 4th day of November 1997 ("Effective Date"), by and between First Federal
Savings Bank of New Castle (the "Savings Bank") and Lonny D. Robinson (the
"Employee").
WHEREAS, the Employee is currently employed by the Savings Bank as Vice
President and Treasurer and is experienced in certain phases of the business of
the Savings Bank; and
WHEREAS, the parties desire by this writing to set forth the rights and
responsibilities of the Savings Bank and Employee if the Savings Bank should
undergo a change in control (as defined hereinafter in the Agreement) after the
Effective Date.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed in the capacity as the Vice
President and Treasurer of the Savings Bank. The Employee shall render such
administrative and management services to the Savings Bank and any parent
savings and loan holding company ("Parent") as are currently rendered and as are
customarily performed by persons situated in a similar executive capacity. The
Employee's other duties shall be such as the Board of Directors for the Savings
Bank (the "Board of Directors" or "Board") may from time to time reasonably
direct, including normal duties as an officer of the Savings Bank and the
Parent.
2. Term of Agreement. The term of this Agreement shall be for the
period commencing on the Effective Date and ending thirty-six (36) months
thereafter ("Term").
3. Termination of Employment in Connection with or Subsequent to
--------------------------------------------------------------
a Change in Control.
-------------------
(a) Notwithstanding any provision herein to the contrary, in the event
of the involuntary termination of Employee's employment under this Agreement,
absent Just Cause, in connection with, or within thirty-six (36) months after,
any Change in Control of the Savings Bank or Parent, Employee shall be paid an
amount ("Severance Payment") equal to 2.99 times such Employee's five year
average taxable compensation paid to the Employee by the Savings Bank (whether
said amounts were received or deferred by the Employee) and the costs associated
with maintaining coverage under the Savings Bank's medical and dental insurance
reimbursement plans similar to that in effect on the date of termination of
employment for a period of one year thereafter. Said sum shall be paid, at the
option of Employee, either in one (1) lump sum within thirty (30) days of such
termination or in periodic payments over the next
1
<PAGE>
36 months, and such payments shall be in lieu of any other future payments which
the Employee would be otherwise entitled to receive. Notwithstanding the
foregoing, such amounts payable hereunder shall be reduced by 1/36 for each full
month that Employee remains employed beyond the date of such Change in Control;
provided however, that such Severance Amount shall in no event be less than 150%
of the annualized base salary in effect for such Employee as of the date of such
Change in Control. Notwithstanding the forgoing, all sums payable hereunder
shall be reduced in such manner and to such extent so that no such payments made
hereunder when aggregated with all other payments to be made to the Employee by
the Savings Bank or the Parent shall be deemed an "excess parachute payment" in
accordance with Section 280G of the Internal Revenue Codes of 1986, as amended
(the "Code") and be subject to the excise tax provided at Section 4999(a) of the
Code. The term "Change in Control" shall mean: (i) the sale of all, or a
material portion, of the assets of the Savings Bank or the Parent; (ii) the
merger or recapitalization of the Savings Bank or the Parent whereby the Savings
Bank or the Parent is not the surviving entity; (iii) a change in control of the
Savings Bank or the Parent, as otherwise defined or determined by the Office of
Thrift Supervision or regulations promulgated by it; or (iv) the acquisition,
directly or indirectly, of the beneficial ownership (within the meaning of that
term as it is used in Section 13(d) of the Securities Exchange Act of 1934 and
the rules and regulations promulgated thereunder) of twenty-five percent (25%)
or more of the outstanding voting securities of the Savings Bank or the Parent
by any person, trust, entity or group. The term "person" means an individual
other than the Employee, or a corporation, partnership, trust, association,
joint venture, pool, syndicate, sole proprietorship, unincorporated organization
or any other form of entity not specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the
contrary except as provided at Sections 4 and 5, Employee may voluntarily
terminate his employment under this Agreement within thirty-six months following
a Change in Control of the Savings Bank or Parent, and Employee shall thereupon
be entitled to receive the payment and benefits described in Section 3(a) of
this Agreement, upon the occurrence, or within ninety (90) days thereafter, of
any of the following events, which have not been consented to in advance by the
Employee in writing: (i) if Employee would be required to move his personal
residence or perform his principal executive functions more than thirty-five
(35) miles from the Employee's primary office as of the signing of this
Agreement; (ii) if in the organizational structure of the Savings Bank or
Parent, Employee would be required to report to a person or persons other than
the Board, the President or a Vice President of the Savings Bank or Parent;
(iii) if the Savings Bank or Parent should fail to maintain the Employee's base
compensation in effect as of the date of the Change in Control and existing
employee benefits plans, including material fringe benefit, stock option and
retirement
2
<PAGE>
plans, except to the extent that such reduction in benefit programs is part of
an overall adjustment in benefits for all employees of the Savings Bank or
Parent and does not disproportionately adversely impact the Employee; (iv) if
Employee would be assigned duties and responsibilities other than those normally
associated with his position as referenced at Section 1, herein; or (v) if
Employee's responsibilities or authority have in any way been materially
diminished or reduced.
4. Other Changes in Employment Status.
----------------------------------
Except as provided for at Section 3, herein, the Board of Directors may
terminate the Employee's employment at any time with or without Just Cause
within its sole discretion. This Agreement shall not be deemed to give Employee
any right to be retained in the employment or service of the Bank, or to
interfere with the right of the Bank to terminate the employment of the Employee
at any time. The Employee shall have no right to receive compensation or other
benefits for any period after termination for Just Cause. Termination for "Just
Cause" shall include termination because of the Employee's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule or regulation (other than traffic violations or similar offenses) or
final cease-and-desist order, or material breach of any provision of the
Agreement.
5. Regulatory Exclusions.
---------------------
(a) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Savings Bank's affairs by an order issued
under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA")
(12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Savings Bank under
this Agreement shall terminate, as of the effective date of the order, but the
vested rights of the parties shall not be affected.
(b) If the Savings Bank is in default (as defined in Section 3(x)(1) of
FDIA) all obligations under this Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the
contracting parties.
(c) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Savings Bank: (i) by the Director of the Office of
Thrift Supervision ("Director of OTS"), or his or her designee, at the time that
the Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Savings Bank under the authority
contained in Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his
or her designee, at the time that the Director of the OTS, or his or her
designee approves a supervisory merger to
3
<PAGE>
resolve problems related to operation of the Savings Bank or when the Savings
Bank is determined by the Director of the OTS to be in an unsafe or unsound
condition. Any rights of the parties that have already vested, however, shall
not be affected by such action.
(d) If the Employee is suspended and/or temporarily prohibited from
participating in the conduct of the Savings Bank's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(3) and (g)(1)),
the Savings Bank's obligations under the Agreement shall be suspended as of the
date of service, unless stayed by appropriate proceedings. If the charges in the
notice are dismissed, the Savings Bank may within its discretion (i) pay the
Employee all or part of the compensation withheld while its contract obligations
were suspended and (ii) reinstate any of its obligations which were suspended.
(e) Notwithstanding anything herein to the contrary, any payments made
to the Employee pursuant to the Agreement, or otherwise, shall be subject to and
conditioned upon compliance with 12 USC ss.1828(k) and any regulations
promulgated thereunder.
6. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon
any corporate or other successor of the Savings Bank or Parent, which shall
acquire, directly or indirectly, by merger, consolidation, purchase or
otherwise, all or substantially all of the assets or stock of the Savings Bank
or Parent.
(b) The Employee shall be precluded from assigning or delegating his
rights or duties hereunder without first obtaining the written consent of the
Savings Bank.
7. Amendments. No amendments or additions to this Agreement shall be
binding upon the parties hereto unless made in writing and signed by both
parties, except as herein otherwise specifically provided.
8. Applicable Law. This agreement shall be governed by all respects
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the Commonwealth of Pennsylvania, except to the extent that Federal law
shall be deemed to apply.
9. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
10. Arbitration. Any controversy or claim arising out of or
relating to this Agreement, or the breach thereof, shall be settled
4
<PAGE>
by arbitration in accordance with the rules then in effect of the district
office of the American Arbitration Association ("AAA") nearest to the home
office of the Savings Bank, and judgment upon the award rendered may be entered
in any court having jurisdiction thereof, except to the extend that the parties
may otherwise reach a mutual settlement of such issue. The Savings Bank shall
reimburse Employee for all reasonable costs and expenses, including reasonable
attorneys' fees, arising from such dispute, proceedings or actions, following
the delivery of the decision of the arbitrator finding in favor of the Employee.
Further, the settlement of the dispute to be approved by the Board of the
Savings Bank or the Parent may include a provision for the reimbursement by the
Savings Bank or Parent to the Employee for all reasonable costs and expenses,
including reasonable attorneys' fees, arising from such dispute, proceedings or
actions, or the Board of the Savings Bank or the Parent may authorize such
reimbursement of such reasonable costs and expenses by separate action upon a
written action and determination of the Board following settlement of the
dispute.
11. Confidential Information. The Employee acknowledges that during his
or her employment he or she will learn and have access to confidential
information regarding the Bank and the Parent and its customers and businesses
("Confidential Information"). The Employee agrees and covenants not to disclose
or use for his or her own benefit, or the benefit of any other person or entity,
any such Confidential Information, unless or until the Bank or tthe Parent
consents to such disclosure or use or such information becomes common knowledge
in the industry or is otherwise legally in the public domain. The Employee shall
not knowingly disclose or reveal to any unauthorized person any Confidential
Information relating to the Bank, the Parent, or any subsidiaries or affiliates,
or to any of the businesses operated by them, and the Employee confirms that
such information constitutes the exclusive property of the Bank and the Parent.
The Employee shall not otherwise knowingly act or conduct himself (a) to the
material detriment of the Bank or the Parent, or its subsidiaries, or
affiliates, or (b) in a manner which is inimical or contrary to the interests of
the Bank or the Parent. Employee acknowledges and agrees that the existence of
this Agreement and its terms and conditions constitutes Confidential Information
of the Bank, and the Employee agrees not to disclose the Agreement or its
contents without the prior written consent of the Bank. Notwithstanding the
foregoing, the Bank reserves the right in its sole discretion to make disclosure
of this Agreement as it deems necessary or appropriate in compliance with its
regulatory reporting requirements. Notwithstanding anything herein to the
contrary, failure by the Employee to comply with the provisions of this Section
may result in the immediate termination of the Agreement within the sole
discretion of the Bank, disciplinary action against the Employee taken by the
Bank, including but not limited to the termination of employment of the Employee
for breach of the Agreement and the provisions of this
5
<PAGE>
Section, and other remedies that may be available in law or in equity.
12. Entire Agreement. This Agreement together with any
understanding or modifications thereof as agreed to in writing by the parties,
shall constitute the entire agreement between the parties hereto.
6
EXHIBIT 13
1997 ANNUAL REPORT
<PAGE>
[GRAPH]
Table of Contents Page
Selected Consolidated Data 2
Report to Shareholders 3
Management's Discussion and Analysis 4
Independent Auditors' Report 11
Consolidated Financial Statements 12
Notes to Consolidated Financial Statements 17
Capital Stock Information 37
Directors and Executive Officers 38
1
<PAGE>
<TABLE>
<CAPTION>
Selected Consolidated Financial and Other Data
(Dollars in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------------------
At December 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $ 374,972 $ 405,785 $ 332,121 $ 311,940 $ 296,993
Loans receivable, net 256,006 255,770 228,278 215,286 200,634
Investment securities 94,659 125,289 80,587 76,791 62,948
FHLB advances and other borrowings 47,725 86,455 26,666 15,009
Deposits 275,221 267,619 254,406 249,957 252,537
Total equity 47,862 43,054 47,623 43,881 42,263
Book value per share, net of treasury shares $ 23.13 $ 20.90 $ 20.62 $ 18.82 $ 18.09
For the Year Ended December 31,
- --------------------------------------------
Net interest income 12,598 12,650 11,068 10,037 9,235
Net income 4,586 3,010 3,079 2,273 2,515
Net income (2) 4,040
Earnings per share - basic (1) $ 2.31 $ 1.40 $ 1.41 $ 1.05 $ 0.76
Earnings per share - basic (2) $ 1.87
Earnings per share - diluted (1) $ 2.24 $ 1.34 $ 1.35 $ 1.00 $ 0.73
Earnings per share - diluted (2) $ 1.80
Dividends per share $ 0.57 $ 0.46 $ 0.38 $ 0.26 $ 0.12
Dividend payout ratio 24.93% 32.87% 27.50% 25.68% N/A
At or for the Year Ended December 31,
- --------------------------------------------
Return on average assets 1.15% 0.82% 0.96% 0.75% 0.86%
Return on average assets (2) 1.10%
Return on average equity 10.20% 6.43% 6.74% 5.26% 6.96%
Return on average equity (2) 8.63%
Average equity to average assets 11.31% 12.69% 14.25% 14.34% 12.32%
Average interest rate spread (FTE) 2.93% 3.04% 3.04% 2.90% 2.84%
Non-interest expense to average assets 1.47% 2.20% 1.91% 2.21% 2.14%
Non-interest expense to average assets (2) 1.75%
Net yield on average interest-earning assets (FTE) 3.47% 3.65% 3.68% 3.45% 3.29%
Average interest-earning assets to average interest-
bearing liabilities 112.24% 114.56% 115.68% 114.88% 111.20%
Non-performing assets to total assets 1.04% 0.43% 0.50% 0.80% 1.08%
Non-performing loans to total loans receivable, net 1.08% 0.40% 0.31% 1.03% 1.50%
Allowance for loan losses to gross loans receivable 1.24% 1.11% 1.07% 1.24% 1.10%
Number of full service offices 4 4 4 4 5
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(FTE) Fully taxable-equivalent basis
(1) Per share data for 1993 was computed on net income and common stock
equivalents outstanding from April 5, 1993, the date the Company
completed its initial Stock Offering.
(2) Excludes one-time special assessment of $1.03 million after tax to
recapitalize the Savings Association Insurance Fund (SAIF).
2
<PAGE>
To Our Shareholders
I am pleased to report that in our fiscal year ended December 31, 1997, First
Shenango's earnings reached record levels. Net income for the year totaled
$4,585,690 or $2.24 per share compared to $3,009,997 or $1.34 per share for the
fiscal year ended December 31, 1996, adjusted for a one-time net assessment of
$1,030,000 to recapitalize the Savings Association Insurance Fund. Without this
charge, First Shenango's income for 1996 would have been $4,039,997 or $1.80 per
share.
Our record results were achieved through the strength of First Federal Savings
Bank of New Castle's core earnings generated by its traditional banking products
and prudent cost controls. In 1996, First Federal made the decision to reduce
its credit risk by concentrating on first mortgage residential loans and
limiting the number of automobile loans it would make. As a result, first
mortgage residential loans increased $15,694,000 or 10.21% and consumer loans
declined $15,191,000 or 29.85%. Our net interest income after provision for loan
losses was $11,825,000 in 1997 compared to $11,752,000 in 1996. This move and a
decline in mortgage loan interest rates resulted in a decline in our net
interest margin from 3.55% in 1996 to 3.38% in 1997.
Total assets at year end were $374,972,000 compared to $405,785,000 at December
31, 1996. The majority of this decrease was a result of our decision to repay
approximately $30,000,000 of Federal Home Loan Advances in the fourth quarter of
1997. First Shenango's return on average assets for 1997 was 1.15% compared to
0.82% for 1996. Our return on average equity for 1997 increased to 10.20% from
6.43% for 1996.
At December 31, 1997, our non-performing assets totaled $3,890,000 or 1.04% of
assets compared to $1,750,000 or 0.43% on December 31, 1996. The increase is
primarily the result of two (2) loans totaling approximately $1,400,000 that
became substandard in the fourth quarter of 1997. One of these loans in the
amount of $304,000 has since been paid in full.
On December 31, 1997, First Shenango's capital ratio was 12.76% and the First
Federal's Tier I core capital ratio was 10.42%, which exceeds all regulatory
requirements.
As of December 31, 1997, book value per share increased to $23.13 from $20.90 on
December 31, 1996. Because of the excellent year, your directors approved
increasing the quarterly dividend from $.12 to $.15 per share effective in July.
The cornerstone of First Federal's success is its quality service. Always
looking to improve service, the Savings Bank expanded its Neshannock Township
office and relocated its Union Township office from a plaza to a free-standing
facility with drive-up facilities that have been well received.
The position we hold in the community is the result of the commitment and skill
of our employees and management team and the strong leadership and direction
provided by our Board of Directors. To them, I offer my appreciation.
Your Board of Directors recognized that to continue to provide quality,
competitive service and to enable it to fulfill its fiduciary responsibilities
to its stockholders, the Savings Bank needed additional resources. In September
1997, it engaged the services of McDonald and Company Securities, Inc. to assist
in its search for a merger partner. After exhaustive reviews and due diligence,
we signed an "Agreement of Affiliation and Plan of Merger" with FirstFederal
Financial Services Corp on February 6, 1998. As explained in the proxy for the
1998 Annual Meeting, the merger is contingent on approval of the stockholders of
both companies and the regulatory authorities.
Sincerely,
/s/ Francis A. Bonadio
Francis A. Bonadio
President and Chief Executive Officer
3
<PAGE>
<TABLE>
<CAPTION>
Management's Discussion and Analysis
- ----------------------------------------------------------------------------------------
Table 1
Yields Earned and Rates Paid on a Fully Taxable-Equivalent Basis (1)
(Dollar Amounts in Thousands)
1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average Interest-Earning Assets
Interest-bearing deposits in financial institutions
Average balance $ 11,373 $ 8,374 $ 5,635
Interest income $ 610 $ 461 $ 321
Weighted average yield 5.36% 5.51% 5.70%
Time deposits in financial institutions
Average balance $ 373
Interest income $ 14
Weighted average yield 3.75%
Investment securities
Average balance $120,030 $108,560 $ 83,189
Interest income $ 8,813 $ 7,707 $ 5,793
Weighted average yield 7.34% 7.10% 6.96%
First mortgage residential loans (2)
Average balance $161,369 $140,044 $126,690
Interest income $ 12,456 $ 10,874 $ 9,798
Weighted average yield 7.72% 7.76% 7.73%
Commercial and other real estate loans (2)
Average balance $ 48,472 $ 42,540 $ 31,536
Interest income $ 4,554 $ 4,044 $ 2,928
Weighted average yield 9.40% 9.51% 9.28%
Consumer loans (2)
Average balance $ 46,543 $ 59,791 $ 64,200
Interest income $ 3,975 $ 4,981 $ 5,320
Weighted average yield 8.54% 8.33% 8.29%
- ----------------------------------------------------------------------------------------
Average Interest-Earning Assets
Average balance $387,787 $359,309 $311,623
Interest income $ 30,408 $ 28,067 $ 24,174
Weighted average yield 7.84% 7.81% 7.76%
Average Non-Interest-Earning Assets $ 9,767 $ 9,504 $ 8,901
- ----------------------------------------------------------------------------------------
TOTAL AVERAGE ASSETS $397,554 $368,813 $320,524
========================================================================================
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Management's Discussion and Analysis
- -------------------------------------------------------------------------------------------
Table 1
Yields Earned and Rates Paid on a Fully Taxable-Equivalent Basis (1)
(Dollar Amounts in Thousands)
1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average Interest-Bearing Liabilities
Money market & NOW deposits
Average balance $ 46,293 $ 40,138 $ 36,867
Interest expense $ 1,347 $ 1,052 $ 860
Weighted average rate 2.91% 2.62% 2.33%
Savings deposits
Average balance $ 58,964 $ 62,643 $ 66,790
Interest expense $ 1,559 $ 1,656 $ 1,763
Weighted average rate 2.64% 2.64% 2.64%
Certificates of deposit
Average balance $162,019 $153,721 $146,514
Interest expense $ 9,676 $ 9,108 $ 9,020
Weighted average rate 5.97% 5.93% 6.16%
Total average interest-bearing deposits
Average balance $267,276 $256,502 $250,171
Interest expense $ 12,582 $ 11,816 $ 11,643
Weighted average rate 4.71% 4.61% 4.65%
Borrowings
Average balance $ 76,084 $ 55,401 $ 17,456
Interest expense $ 4,339 $ 3,114 $ 1,043
Weighted average rate 5.70% 5.62% 5.98%
Advance payments from borrowers for taxes and insurance
Average balance $ 2,132 $ 1,730 $ 1,755
Interest expense $ 41 $ 30 $ 32
Weighted average rate 1.92% 1.73% 1.82%
- -------------------------------------------------------------------------------------------
Average Interest-Bearing Liabilities
Average balance $345,492 $313,633 $269,382
Interest expense $ 16,962 $ 14,960 $ 12,718
Weighted average rate 4.91% 4.77% 4.72%
- -------------------------------------------------------------------------------------------
Average Non-Interest-Bearing Liabilities $ 7,096 $ 8,368 $ 5,475
Average Shareholders' Equity $ 44,966 $ 46,812 $ 45,667
- -------------------------------------------------------------------------------------------
TOTAL AVERAGE LIABILITIES AND SHAREHOLDERS' EQUITY $397,554 $368,813 $320,524
===========================================================================================
Net interest earnings $ 13,446 $ 13,107 $ 11,456
Net yield on average interest-earning assets 3.47% 3.65% 3.68%
</TABLE>
(1) In order to make pre-tax income and resultant yields comparable to taxable
equivalent loans and investments, a tax equivalent adjustment is computed using
a statutory federal income tax rate of 34% and has increased interest income by
$848, $457, and $387 for the years ended December 31, 1997, 1996 and 1995,
respectively.
(2) The loan amounts include average non-performing loans of $1,690, $809, and
$1,869 at December 31, 1997, 1996 and 1995, respectively.
5
<PAGE>
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
General
The purpose of this discussion is to provide information about First Shenango
Bancorp, Inc. ("the Company"), which is not readily apparent from the
consolidated financial statements included in this annual report. Reference
should be made to those statements and the selected financial data presented
elsewhere in this report for an understanding of the following discussion and
analysis. The Company functions as a financial intermediary and, as such, its
financial condition should be examined in terms of its ability to manage its
assets and liabilities and diversify its risk.
Net income for the year ended December 31, 1997 was $4,585,690, or $2.24 per
diluted share, compared to $3,009,997, or $1.34 per diluted share for the year
ended December 31, 1996, and $3,079,186, or $1.35 per diluted share for the year
ended December 31, 1995.
As discussed in last year's report, on September 30, 1996, President Clinton
signed the Deposit Insurance Funds Act of 1996 which included long anticipated
legislation to recapitalize the Savings Association Insurance Fund ("SAIF") via
a special assessment on thrift industry deposits. As a result of this
legislation, the Company recorded a pre-tax charge to income of $1.67 million on
September 30, 1996 for the payment which was ultimately made on November 27,
1996. This charge to income reduced the Company's net income by $1.03 million
for the year after considering the associated income taxes. Without this charge,
the Company's net income for 1996 would have been $4.04 million, diluted
earnings per share $1.80, the return on average assets 1.10% and the return on
average equity 8.63%.
This legislation also reduced the Company's SAIF insurance fees from $0.23 per
$100.00 (23 basis points) annually to approximately 6.4 basis points annually
effective January 1, 1997. Although this remains higher than the approximately
1.3 basis points paid by Bank Insurance Fund (BIF) insured institutions, it
represents a significant improvement from the 23 basis point disparity which had
been present.
Interest Income and Interest Expense
During 1997, the Company once again experienced growth in average
interest-earning assets, particularly in mortgage and commercial loans and
investment securities. This growth led to a $2.34 million increase in interest
income adjusted to a fully taxable-equivalent basis. This increase would have
been larger if not for the slightly lower yields earned on the mortgage and
commercial loan portfolios. The Company continued to reduce its exposure to
indirect automobile lending during 1997 due to the low risk-adjusted returns
available in the local market area.
During 1996, the Company experienced significant growth in average
interest-earning assets, particularly in mortgage and commercial loans and
investment securities. This growth, combined with slightly higher average
yields, led to a $3.89 million increase in interest income adjusted to a fully
taxable-equivalent basis. The Company reduced its focus on consumer lending,
specifically indirect automobile lending, during 1996 due to the low
risk-adjusted returns available in the local market area and an increase in
delinquencies and charge-offs.
Average interest-bearing liabilities also increased during 1997 and 1996, as the
Company utilized Federal Home Loan Bank borrowings to leverage its investment
portfolio, and to fund increased loan demand. This also resulted in a higher
weighted average rate paid on interest-bearing liabilities in both years. Net
interest income adjusted to a fully taxable-equivalent basis increased slightly
in 1997, primarily due to a $13.35 million increase in the average balance of
tax exempt municipal bonds held in the investment portfolio in 1997 versus 1996.
This increase offset the overall reduction in net interest-earning assets in
1997 and the 14 basis point increase in the weighted average rate paid on
interest-bearing liabilities.
On October 3, 1997, the Company sold long-term GNMA fixed rate mortgage-backed
securities with amortized cost and market values of $16,527,904 and $16,510,648,
respectively, at a net loss of $17,256. The proceeds from the sale of these
securities were used to reduce short-term FHLB borrowings. While this
transaction did reduce the Company's overall interest rate risk position, it
also contributed to the slight decline in net interest income due to the
positive spread which had been earned on these assets and liabilities.
Provision for Loan Losses
Provisions for loan losses declined during 1997 and 1996 as non-performing loans
remained at a relatively low level during most of these two years. The increase
in non-performing loans at December 31, 1997 is primarily due to two commercial
loans totalling approximately $1.42 million, and an overall increase in consumer
loan delinquencies. As a result of the increase in non-performing assets, senior
management has taken a more active role in the collection function and has hired
a new manager for this department. One of the aforementioned commercial loans,
with a principal balance of $304,000 has since been paid in full.
6
<PAGE>
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
The increased collection activity is anticipated to increase charge-offs in the
first quarter of 1998 as compared to the fourth quarter of 1997, however,
management believes that reserves for loan losses are adequate to absorb any
such increase. Legal action has also been instituted against certain borrowers.
Management considers this to be a temporary situation and is moving aggressively
to reduce non-performing assets.
Non-Interest Income and Non-Interest Expense
Total non-interest income decreased $237,000 in 1997, primarily due to a
$206,000 decrease in gains on sales of investments and loans. Gains on the sale
of education loans to Sallie Mae remained relatively unchanged at $34,000 in
1997 versus $35,000 in 1996. The 1997 sale of GNMA mortgage-backed securities
referred to previously was the only sale of investment securities in 1997, while
net gains on investment security sales in 1996 totalled $187,000. Service
charges and other fees declined in 1997 as increases in late charges collected
on loans were offset by lower fees on deposit accounts. Management anticipates
an increase in service charge and other fee income in 1998 due to the pending
introduction of debit cards and a revised fee schedule. Total non-interest
income increased 6.42% in 1996 due to a $123,000 increase in the gain on sale of
investments and loans. This increase was partially offset by a $54,000 decrease
in service charges and other fees, primarily due to fewer non-sufficient funds
charges on checking accounts.
Total non-interest expense decreased $2.27 million in 1997 primarily due to a
$2.05 million reduction in deposit insurance premiums due to the SAIF special
assessment paid in 1996 and the resulting reduction in the premium rate. Other
non-interest expense categories experienced small changes from 1996 to 1997.
Total non-interest expense increased $1.97 million in 1996 compared to 1995. The
primary reason for this increase is the $1.67 million paid by the Company in
order to recapitalize the SAIF. Also contributing to the increase were a
$180,000 increase in REO expenses, reflecting the costs of maintaining the
properties held in REO, as well as charges taken to write-down two foreclosed
properties to their estimated realizable value. Salaries and benefits increased
$227,000, or 8.11%, in 1996 as a result of normal annual merit increases in
salaries, increased ESOP amortization expenses due to the Company's higher
average stock price and overtime worked to meet loan demand.
The Company's efficiency ratio was 43.70% for 1997 as compared to 60.25% in 1996
and 51.42% in 1995. Excluding the SAIF assessment, the 1996 ratio would have
been 47.86%. The improvement in this ratio is evidence of management's
continuing dedication to cost control.
Income Taxes
Applicable income taxes of $2,194,000 in 1997 consist of both federal and state
taxes amounting to $1,755,000 and $439,000, respectively. During 1997 and 1996,
the Company's Investment Committee increased the Company's investment in
tax-exempt municipal securities. The objective of this strategy was to obtain an
above-market taxable-equivalent yield while reducing the Company's effective tax
rate. See Note 8 of Notes to Consolidated Financial Statements for a
reconciliation from the statutory federal tax rate to the Company's effective
tax rate for each of the past three years.
Asset and Liability Management
The ability to maximize net interest income is largely dependent upon the
achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing 'gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities, and is considered negative when the amount of
interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets during a given time period. Generally, during a period of
rising interest rates, a negative gap within shorter maturities would adversely
affect net interest income, while a positive gap within shorter maturities would
result in an increase in net interest income, and during a period of falling
interest rates, a negative gap within shorter maturities would result in an
increase in net interest income while a positive gap within shorter maturities
would have the opposite effect. At December 31, 1997, the Company had a positive
one year cumulative interest rate sensitivity gap of 0.54%, a significant
improvement from the negative 6.06% cumulative one year gap at December 31,
1996. This gap analysis incorporates certain assumptions concerning the
amortization of loans and other interest-earning assets and the withdrawal of
deposits. Loans and mortgage-backed securities have assumed annual prepayment
rates of 9% to 37%. Decay rates for NOW, money market, and savings accounts are
37%, 79%, and 17%, respectively.
The Company's actions with respect to interest-rate risk and its asset/liability
gap management are taken under the guidance of the Investment Committee of the
Board of Directors. This Committee meets monthly to, among other things, set
interest-rate risk targets and review the Company's current composition of
assets and liabilities in light of the prevailing interest-rate environment. The
7
<PAGE>
Committee assesses its interest-rate risk strategy quarterly which is reviewed
by the full Board of Directors. On an individual security basis, the following
assumptions are considered: prepayment speed, interest-rate shocks or stress
test results, projected cash flows, and the consideration of funding sources and
their repricing and maturity characteristics.
The Company has historically emphasized the origination of long-term, fixed-rate
residential real estate loans for retention in its portfolio. At December 31,
1997, $131.93 million or 51.53% of the Company's total loan portfolio consisted
of fixed-rate residential mortgage or construction loans. The Company
anticipates that it will continue to hold the majority of its loan portfolio in
long-term fixed-rate loans. However, the Company has employed a strategy to
originate variable rate commercial loans whereby repricing coincides with the
prime rate or treasury index. At December 31, 1997, the gross commercial loans
with variable rates were $30.80 million or 12.09% of the total loan portfolio.
Over the years, the Company has originated consumer loans which typically have
shorter maturities of three to five years. Gross consumer loans held by the
Company at December 31, 1997, were $40.13 million or 15.67% of the Company's
total loan portfolio. The Company has classified 100% of its investment
portfolio as available for sale which is $94.66 million or 25.24% of total
assets at December 31, 1997. This provides the Company with the flexibility to
sell such securities if deemed appropriate in response to, among other things,
changes in interest rates.
Management presently monitors and evaluates the potential impact of interest
rate changes upon the Net Portfolio Value (NPV) of the Company's portfolio
equity and the level of net interest income on a quarterly basis. NPV is the
difference between incoming and outgoing discounted cash flows from assets,
liabilities, and off-balance sheet contracts. The Company utilizes an outside
banking consultant for assistance in modeling its interest-rate risk position.
At December 31, 1997, given an immediate and sustained 200 basis point increase
in interest rates, the Company's NPV would have declined by approximately 26% as
shown in the table below. This represents a significant improvement from the
approximately 39% decline if it was calculated as of December 31, 1996. This
information is highly dependent on the assumptions used and could vary
substantially if different assumptions were used. The assumptions used are the
same as those used in the gap analysis discussed above.
The following table represents the Company's NPV as of December 31, 1997.
<TABLE>
<CAPTION>
Net Portfolio Value
- ------------------------------------------------------------------------------------------------------
Estimated
Change in NPV as a
Interest Rates Estimated Percentage Amount
(basis points) NPV of Assets of Change Percent Change
- ------------------------- -------------- ----------------- ---------------- ---------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
+400 $26,462 7.60% $(28,279) (52)%
+300 33,397 9.34 (21,345) (39)
+200 40,745 11.09 (13,996) (26)
+100 48,047 12.73 (6,694) (12)
-- 54,741 14.15 -- --
-100 60,490 15.30 5,748 11
-200 65,399 16.21 10,658 19
-300 71,033 17.23 16,292 30
-400 70,074 18.67 24,333 44
</TABLE>
As noted in the above table, significant increases in interest rates may
adversely affect the Company's net interest income and/or NPV because of the
excess of interest-bearing liabilities over interest-earning assets repricing
within shorter periods and because the Company's adjustable-rate,
interest-earning assets generally are not as responsive to changes in interest
rates as its interest-bearing liabilities. This is due to terms which generally
permit only annual adjustments to the interest rate and which generally limit
the amount which interest rates thereon can adjust at such time and over the
life of the related asset. In addition, the proportion of adjustable-rate loans
and assets in the Company's loan and investment portfolio could decrease in
future periods if market rates of interest remain at or decrease below current
levels.
8
<PAGE>
Liquidity and Capital Resources
The Savings Bank is required to maintain minimum levels of liquid assets as
defined by the OTS regulations. This requirement, which may be varied from time
to time depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. On November 24, 1997, the OTS
published a final rule which lowered the liquidity requirement from 5% to 4%,
eliminated a separate limit that required thrifts to hold assets equal to 1% of
the liquidity based in cash or short term liquid assets, streamlined the
calculations used to measure compliance with liquidity requirements, expanded
the types of investments considered to be liquid assets and reduced the
liquidity base by modifying the definition of net withdrawable accounts to
exclude accounts with maturities exceeding one year. The Savings Bank's
regulatory liquidity ratio averaged 5.29% during the year ended December 31,
1997. The Savings Bank manages its liquidity ratio to meet its funding needs,
including deposit outflows, disbursement of payments collected from borrowers
for taxes and insurance, loan principal disbursements and to meet its asset and
liability management objectives.
The Company's operating activities generated positive cash flows of $6,048,000
in 1997, compared to $4,174,000 in 1996 and $4,692,000 in 1995. The primary
sources of operating cash flows in 1997, 1996 and 1995 were net income combined
with non-cash expenses, such as provision for estimated loan losses,
amortization of MSBPs and ESOP unearned and deferred compensation and
depreciation expense. It is anticipated that cash flows from operating
activities will not change significantly in future periods.
Scheduled loan repayments and maturing investment securities are a relatively
predictable source of funds. However, savings deposit flows and prepayments on
loans and mortgage-backed securities are significantly influenced by changes in
market interest rates, economic conditions and competition. The Savings Bank
strives to manage the pricing of its deposits to maintain a balanced stream of
cash flows commensurate with its loan commitments and other predictable funding
needs.
As part of an ongoing effort to improve the Company's return on equity,
management identified the need to utilize its strong capital position to
leverage the balance sheet. Toward that end, beginning in late 1994, the Savings
Bank began utilizing FHLB borrowings to fund investment security purchases and
increased mortgage and commercial loan volume. This activity was curtailed
somewhat in 1997 due to the relatively small spreads available in the market.
Management expects to pursue additional arrangements of this type in 1998 if
sufficient spreads are available. This will have the effect of reducing the
Savings Bank's capital ratios slightly, however, these ratios will be maintained
comfortably above the regulatory requirements.
The Savings Bank invests its excess funds in an overnight deposit account with
the FHLB of Pittsburgh. This provides sufficient liquidity to meet immediate
loan commitment and savings withdrawal funding requirements. When applicable,
cash in excess of immediate funding needs is invested into longer-term
investments and mortgage-backed securities which typically earn a higher yield
than overnight deposits. These types of investments may qualify as liquid
investments under OTS regulations.
The Savings Bank anticipates that it will have sufficient funds available to
meet its current loan commitments and normal savings withdrawals. At December
31, 1997, the Savings Bank had outstanding commitments to fund off balance sheet
items of $21,166,000. In addition, it had certificates of deposit scheduled to
mature within one year of $80,206,000, substantially most of which management
believes will remain with the Savings Bank. In the event that loan demand and
deposit outflows exceed available funds, the Savings Bank may borrow from the
FHLB or sell securities from its available for sale portfolio.
The Company's ability to pay dividends to shareholders is dependent upon the
Company's available funds and dividends it receives from the Savings Bank. The
Savings Bank may not declare or pay a cash dividend on its stock if the effect
thereof would cause the Savings Bank's regulatory capital to be reduced below
(1) the amount required for the liquidation account established in connection
with the Savings Bank's conversion from mutual-to-stock form, or (2) the
regulatory capital requirements imposed by the OTS.
9
<PAGE>
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
OTS regulations require financial institutions to have minimum Tier I core
capital equal to 4.00% of adjusted total assets, minimum Tier I risk-based
capital equal to 4.00% of risk-adjusted assets and minimum Tier II risk-based
capital equal to 8.00% of risk-adjusted assets. The Savings Bank significantly
exceeds all regulatory capital requirements. See Note 12 of Notes to
Consolidated Financial Statements.
There has been much publicity recently regarding the inability of many computer
systems to function properly after December 31, 1999 due to how many computer
programs calculate dates. The date September 9, 1999 (9/9/99) will also present
problems for some programs, due to "99" or "9999" being used in some date fields
to indicate something other than a date. Management has formed a committee to
evaluate the Company's exposure to these issues and determine the best course of
action to avoid interruptions in operations when these dates arrive. Management
and the committee will continue to work with various vendors to ensure that all
necessary steps are taken to minimize the Company's potential exposure to these
issues. The total cost to the Company has not yet been determined, however, most
of the expenditures are expected to be for the replacement of certain computer
hardware and software purchased from third parties, and thus will be capitalized
and depreciated over their estimated useful lives. Other costs, such as those
related to the committee's ongoing work, are being expensed as incurred. The
impact on earnings is not expected to be material in any single reporting
period. In addition to the risk exposure presented by internal systems, the
Company is also exposed to a certain unquantifiable amount of risk in the event
that any of its customers or vendors experience difficulties in dealing with
this issue. Management believes that it has identified the Company's most
significant risk areas and is working to minimize the likelihood of loss.
Management is not aware of any trends, events, uncertainties or recommendations
by any regulatory authority that will have, or that are reasonably likely to
have, material effects on liquidity, capital resources or operations.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein have
been prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars, without considering the changes in the relative purchasing
power of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and liabilities of
a financial institution are monetary in nature. As a result, interest rates have
a more significant impact on a financial institution's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the prices of goods and
services, since such prices are affected by inflation.
Outlook for 1998
On February 6, 1998, the Company entered into an Agreement of Affiliation and
Plan of Merger (the "Agreement") with FirstFederal Financial Services Corp.
("FFSW") of Wooster, Ohio. Under the terms of the Agreement, the Company will
merge with and into FFSW, with the Company's shareholders to receive 1.143
shares of FFSW common stock in exchange for each of their shares of the
Company's common stock. FFSW is a bank holding company with total assets of
$1.46 billion at December 31, 1997. The transaction, which will be accounted for
as a pooling of interests, is subject to regulatory and shareholder approvals
and is expected to be completed in the third quarter of 1998. Non-recurring
legal, accounting and consulting fees associated with the planned merger will
reduce net income during the period up to the closing date.
The Savings Bank began offering the new Roth IRA in January 1998 and the Ideal
Check Card in February 1998. Among the benefits of the merger will be the
ability to introduce a wider variety of new products and services than would
otherwise be possible. Potential new products and services which are currently
being considered are uninsured investment products such as mutual funds and
annuities for retail customers and cash management and account analysis for
commercial customers. With the resources of a much larger organization at its
disposal, management also expects to be able to compete for larger loans within
its primary market area.
The statements in this annual report which are not historical fact are forward
looking statements that involve risks and uncertainties, including, but not
limited to, the interest rate environment, the effect of federal and state
banking and tax regulations, the effect of economic conditions, the impact of
competitive products and pricing and other risks detailed in the Company's
Securities and Exchange Commission filings.
10
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders & Board of Directors
First Shenango Bancorp, Inc.
We have audited the accompanying consolidated statements of financial position
of First Shenango Bancorp, Inc. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the First Shenango's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Shenango
Bancorp, Inc., and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
February 6, 1998
11
<PAGE>
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
ASSETS 1997 1996
------------- -------------
<S> <C> <C>
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 2,069,639 $ 1,817,504
Interest-bearing deposits in financial institutions 13,579,118 14,916,979
------------- -------------
15,648,757 16,734,483
Investment securities available for sale, carried at fair value 94,658,748 125,288,762
Loans receivable, net of allowance for loan losses of $3,235,039 and $2,867,270 256,005,938 255,769,702
Accrued interest receivable 2,202,693 2,331,437
REO and other repossessed assets, net 1,111,333 736,852
Premises and equipment, net 5,131,026 4,300,527
Prepaid expenses, sundry assets and deferred taxes 213,231 622,961
------------- -------------
TOTAL ASSETS $ 374,971,726 $ 405,784,724
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (including non-interest-bearing deposits of $4,971,054 and $4,647,926) $ 275,221,031 $ 267,619,176
Advances from Federal Home Loan Bank and other borrowings 47,724,598 86,455,211
Advance payments by borrowers for taxes and insurance 1,876,095 1,600,202
Accrued expenses, deferred taxes and other liabilities 2,287,692 7,055,808
------------- -------------
TOTAL LIABILITIES 327,109,416 362,730,397
SHAREHOLDERS' EQUITY
Preferred stock, no stated value, 10,000,000 shares authorized, none issued
Common stock $.10 par value, 15,000,000 shares authorized, 2,343,098 shares issued 234,310 234,310
Additional paid-in capital 22,136,466 22,422,843
Treasury stock at cost (1997 - 274,091 shares and 1996 - 283,188 shares) (6,233,171) (6,374,001)
Less stock acquired by MSBPs and ESOP (551,287) (674,997)
Net unrealized gains on securities available for sale, net of tax 1,577,880 190,743
Retained earnings (substantially restricted) 30,698,112 27,255,429
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 47,862,310 43,054,327
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 374,971,726 $ 405,784,724
============= =============
</TABLE>
See notes to consolidated financial statements.
12
<PAGE>
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
Interest income: 1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Interest and fees on:
First mortgage residential loans $12,455,760 $10,873,836 $ 9,798,017
Commercial and other real estate loans 4,550,862 4,038,809 2,916,192
Consumer loans 3,974,920 4,980,977 5,319,750
Interest and dividends on investments
Taxable 5,398,544 5,381,830 4,374,893
Tax-exempt 1,701,816 902,260 752,574
Dividends 867,980 970,870 303,798
Other interest 609,897 461,206 321,472
---------------------------------------
TOTAL INTEREST INCOME 29,559,779 27,609,788 23,786,696
---------------------------------------
Interest expense:
Deposits 12,581,867 11,815,409 11,643,299
Borrowed funds 4,379,924 3,144,270 1,075,248
---------------------------------------
TOTAL INTEREST EXPENSE 16,961,791 14,959,679 12,718,547
---------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 12,597,988 12,650,109 11,068,149
Provision for loan losses 772,580 898,479 917,864
---------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 11,825,408 11,751,630 10,150,285
Non-interest income:
Service charges and other fees 758,075 801,346 855,304
Gain on sale of investments and loans, net 16,339 221,902 98,643
Other 15,941 4,510 12,016
---------------------------------------
TOTAL NON-INTEREST INCOME 790,355 1,027,758 965,963
Non-interest expense:
Salaries and employee benefits 3,123,946 3,024,912 2,797,937
Occupancy and equipment, net 934,246 1,026,642 1,069,192
Deposit insurance premiums 170,700 2,225,037 580,714
Professional services 177,784 240,754 286,764
REO operations 102,617 250,128 70,427
Other 1,327,105 1,336,543 1,325,603
---------------------------------------
TOTAL NON-INTEREST EXPENSE 5,836,398 8,104,016 6,130,637
---------------------------------------
INCOME BEFORE INCOME TAXES 6,779,365 4,675,372 4,985,611
Income tax expense:
Federal 1,754,850 1,380,150 1,602,250
State 438,825 285,225 304,175
---------------------------------------
TOTAL INCOME TAX EXPENSE 2,193,675 1,665,375 1,906,425
---------------------------------------
NET INCOME $ 4,585,690 $ 3,009,997 $ 3,079,186
=======================================
Earnings per share - basic $ 2.31 $ 1.40 $ 1.41
Earnings per share - diluted $ 2.24 $ 1.34 $ 1.35
</TABLE>
See notes to consolidated financial statements.
13
<PAGE>
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unallocated Retained
Additional Unallocated Common Unrealized Earnings, Consolidated
Common Paid-In Treasury Common Stock Stock Held Gain (Loss) Substantially Shareholders'
Stock Capital Stock Held by ESOP by MSBPs on Securities Restricted Equity
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31,
1994 $234,310 $22,252,610 $(157,000) $(892,551) $(158,123) $(401,406) $23,002,750 $43,880,590
----------------------------------------------------------------------------------------------------------
Deferred and
unearned
compensation
amortization of
ESOP and MSBPs
shares 100,800 114,568 85,284 300,652
Stock options
exercised (13,560) 43,560 30,000
Net income 3,079,186 3,079,186
Cash dividends
declared on
common stock
at $.38
per share (846,910) (846,910)
Purchase of
25,790 shares
of treasury
stock (419,024) (419,024)
Change in
unrealized
(loss) on
investment
securities
available
for sale, net 1,598,092 1,598,092
----------------------------------------------------------------------------------------------------------
December 31,
1995 234,310 22,339,850 (532,464) (777,983) (72,839) 1,196,686 25,235,026 47,622,586
----------------------------------------------------------------------------------------------------------
Deferred and
unearned
compensation
amortization of
ESOP and MSBPs
shares 126,364 114,283 60,695 301,342
Stock options
exercised (42,524) 95,994 53,470
MSBP shares
forfeited (847) 847
Net income 3,009,997 3,009,997
Cash dividends
declared on
common stock
at $.46 per
share (989,594) (989,594)
Purchase of
254,745 shares
of treasury
stock (5,937,531) (5,937,531)
Change in
unrealized
gain on
investment
securities
available
for sale, net (1,005,943) (1,005,943)
----------------------------------------------------------------------------------------------------------
December 31,
1996 $234,310 $22,422,843 $(6,374,001) $(663,700) $(11,297) $190,743 $27,255,429 $43,054,327
----------------------------------------------------------------------------------------------------------
Deferred and
unearned
compensation
amortization of
ESOP and MSBPs
shares 198,756 112,413 11,297 322,466
Stock options
exercised (485,133) 863,263 378,130
Net income 4,585,690 4,585,690
Cash dividends
declared on
common stock
at $.57 per
share (1,143,007) (1,143,007)
Purchase of
28,716 shares
of treasury
stock (722,433) (722,433)
Change in
unrealized
gain on
investment
securities
available
for sale, net 1,387,137 1,387,137
----------------------------------------------------------------------------------------------------------
December 31,
1997 $234,310 $22,136,466 $(6,233,171) $(551,287) $0 $1,577,880 $30,698,112 $47,862,310
===========================================================================================================
</TABLE>
See notes to consolidated financial statements
14
<PAGE>
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
OPERATING ACTIVITIES 1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Net Income $ 4,585,690 $ 3,009,997 $ 3,079,186
Adjustments to reconcile net income to net cash provided by operating activities:
Net gain on sale of investments and loans (16,339) (221,902) (98,643)
Provisions for estimated losses on loans 772,580 898,479 917,864
Provisions for net losses on REO, repossessed and other assets 11,781 132,726 12,492
Provisions for depreciation and amortization 401,924 429,642 480,740
Amortization of MSBPs and ESOP unearned and deferred compensation 322,466 301,342 300,652
Deferred federal income taxes (232,000) (150,000) (18,000)
Decrease (increase) in accrued interest receivable, prepaid expenses and sundry
assets 297,474 (647,817) (478,182)
Increase in accrued expenses and other liabilities 21,217 199,273 402,422
(Decrease) increase in interest payable (117,008) 222,685 93,612
---------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,047,785 4,174,425 4,692,143
INVESTING ACTIVITIES
Proceeds from maturities of investments and time deposits 21,948,250 18,860,000 33,429,000
Proceeds from sales of investments 16,510,649 29,679,214 26,759,420
Proceeds from sales of education loans 1,997,714 1,939,776 1,309,422
Purchases of investments and time deposits (15,771,847) (98,775,820) (62,980,856)
Principal repayment on mortgage-backed securities and CMOs 8,312,243 7,045,290 3,958,938
Proceeds from sales of foreclosed real estate, repossessed and other assets 386,889 890,790 911,788
Loan originations, net of loans in process (68,176,626) (95,412,559) (69,691,579)
Principal reduction on loans 64,430,540 64,299,586 52,933,224
Redemption (purchase) of FHLB stock 1,715,600 (2,847,600) (32,600)
Additions to premises and equipment (1,232,423) (501,148) (191,817)
---------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 30,120,989 (74,822,471) (13,595,060)
</TABLE>
15
<PAGE>
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
FINANCING ACTIVITIES 1997 1996 1995
---------------------------------------------------
<S> <C> <C> <C>
Net increase (decrease) in money market and NOW deposits 3,899,718 8,827,941 (2,403,749)
Net decrease in savings deposits (3,646,473) (4,000,538) (8,705,485)
Net increase in certificates of deposit 7,368,056 8,372,921 15,547,263
Proceeds from FHLB borrowings 61,930,110 102,998,000 26,216,600
Repayment of FHLB borrowings (100,242,384) (43,420,265) (14,500,000)
Net (decrease) increase in other borrowings (418,339) 211,822 (60,388)
Net increase (decrease) in advance payments by borrowers 275,893 421,800 (216,813)
Net (decrease) increase in other liabilities for unsettled
investment security purchases (4,996,627) 4,996,627
Net proceeds from exercise of stock options 378,130 53,470 30,000
Payment of cash dividend on common stock (1,080,151) (972,278) (780,933)
Purchase of treasury stock (722,433) (5,937,531) (419,024)
---------------------------------------------------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (37,254,500) 71,551,969 14,707,471
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,085,726) 903,923 5,804,554
Cash and cash equivalents at beginning of year 16,734,483 15,830,560 10,026,006
---------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 15,648,757 $ 16,734,483 $ 15,830,560
===================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 17,078,799 $ 14,764,451 $ 12,597,478
Income taxes $ 2,414,269 $ 1,892,830 $ 1,893,707
Non-cash investing activities:
Transfer from investment securities held to maturity to available
for sale $ 36,490,179
Transfer from loans to REO $ 459,338 $ 317,685 $ 2,084,215
Transfer from loans to other repossessed assets $ 649,396 $ 978,062 $ 611,705
Non-cash financing activities:
Dividends declared but not paid $ 302,082 $ 239,225 $ 223,151
</TABLE>
See notes to consolidated financial statements.
16
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of First Shenango
Bancorp, Inc., its wholly-owned subsidiary, First Federal Savings Bank of New
Castle (the "Savings Bank"), and the Savings Bank's wholly-owned subsidiary,
Tri- State Service Corporation. All significant intercompany balances and
transactions have been eliminated in consolidation.
Business
The Savings Bank's primary business activities are to attract savings deposits
from the general public and to invest such deposits, together with other sources
of funds in first mortgage residential, commercial and other real estate and
consumer loans, mortgage-backed and investment securities. The Savings Bank is a
federally chartered stock savings bank headquartered in New Castle,
Pennsylvania, with 109 employees and three additional branch offices located
within and throughout the Lawrence County community. The Savings Bank is a
community oriented full service retail savings institution offering traditional
mortgage lending, along with loan origination activities in multi-family,
commercial real estate, consumer and commercial business loan products primarily
in its local market area. The Savings Bank has roots in this community going
back to 1887. There has been slow economic growth within Lawrence County in
recent years, and the Savings Bank has resorted to developing correspondent
relationships in surrounding counties to develop additional markets for loan
growth. The Savings Bank maintains over 80% of its lending activities within 100
miles of its New Castle headquarters. The Savings Bank's deposits are primarily
from within the Lawrence County community.
Use of Estimates
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates. Most significantly, the
Company uses estimates in determining the allowance for loan losses.
Cash and Cash Equivalents
The Company considers all highly liquid investments such as cash and amounts due
from depository institutions and interest-bearing deposits in financial
institutions which have an original maturity of three months or less as cash and
cash equivalents.
Investment Securities
Securities to be held for indefinite periods of time and not intended to be held
to maturity are classified as "available for sale." Assets included in this
category are those assets that management intends to use as part of its
asset/liability management strategy and that may be sold in response to changes
in interest rates, resultant prepayment risk and other related factors.
Securities available for sale are recorded at their estimated fair value with
unrealized gains and losses, net of deferred taxes, reported as a separate
component of shareholders' equity. Gains and losses on the sale of securities
are determined on the specific identification method. If a security has a
decline in fair value that is other than temporary, the security will be written
down to its fair value by recording a loss in the consolidated statements of
income.
Securities that management has the positive intent and the Company has the
ability at the time of purchase or origination to hold until maturity are
classified as "held to maturity." Securities in this category are carried at
amortized cost adjusted for accretion of discounts and amortization of premiums
using the level yield method over the estimated life of the securities. If a
security has a decline in fair value below its amortized cost that is other than
temporary, the security will be written down to its new basis by recording a
loss in the consolidated statements of income.
17
<PAGE>
FIRST SHENANGO BANCORP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans Receivable
Discounts on first mortgage loans are amortized to income using the level yield
method over the remaining period to contractual maturity, adjusted for
anticipated prepayments. Discounts on other loans are recognized over the lives
of the loans using the level yield method.
The allowance for loan losses is increased by charges to income and decreased by
net charge-offs. Management's periodic evaluation of the adequacy of the
allowance is based on the Company's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
and current economic conditions.
Uncollectible interest on loans that are contractually past due is charged off.
An allowance is established based on management's periodic evaluation or when
the loan is ninety days delinquent. The allowance is established by a charge to
interest income equal to all interest previously accrued, and income is
subsequently recognized only to the extent that cash payments are received
until, in management's judgment, the impairment in the borrower's ability to
make periodic interest and principal payments has been removed, in which case
the loan is returned to accrual status.
The Company is a party to financial instruments with off-balance sheet risk
(commitments to extend credit) in the normal course of business to meet the
financing needs of its customers. Commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any condition established
in the commitment. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee by the customer. Since some
commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash requirements. The
Company evaluates each customer's credit worthiness on a case-by-case basis,
using the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments. The amount of collateral obtained,
if deemed necessary by the Company upon extension of credit, is based upon
management's credit evaluation of the counter-party.
Real Estate Owned and Other Repossessed Assets
Real estate owned, consisting of real estate acquired by foreclosure or deed in
lieu of foreclosure, is recorded at the lower of cost or fair value at date of
acquisition less estimated selling cost. Fair value is defined as the amount
reasonably expected to be received in a current sale between a willing seller
(the Savings Bank) and a willing buyer. Costs incurred in developing or
preparing properties for sale are capitalized. Income and expenses of operating
and holding properties are recorded in operations as incurred. Gains and losses
from sales of such properties are recognized as incurred.
Premises and Equipment
Premises and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the expected useful lives of the assets. The cost of
maintenance and repairs is expensed as it is incurred, and renewals and
betterments are capitalized. When equipment is retired, its cost and the related
accumulated depreciation are generally eliminated from the respective accounts.
Income Taxes
The Company, Savings Bank and its subsidiary file a consolidated federal income
tax return. Each company pays its proportionate share of taxes in accordance
with a tax sharing agreement. Deferred tax assets and liabilities are reflected
at currently enacted income tax rates applicable to the period in which the
deferred tax asset or liability is expected to be realized or settled. Separate
state income tax returns are filed by each entity. Deferred income taxes are
provided by the liability method.
18
<PAGE>
FIRST SHENANGO BANCORP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Deposit Accounts
Interest on deposit accounts is computed monthly and paid or credited to deposit
accounts each calendar quarter, except for certain certificate and checking
accounts which are accrued monthly and paid either monthly, semi-annually or
annually.
Earnings Per Share
During February 1997, the Financial Accounting Standards Board adopted Statement
No. 128, "Earnings per Share," ("FAS 128") which is effective for periods ending
after December 15, 1997. FAS 128 supersedes Accounting Principles Board Opinion
15 and supersedes or amends various other accounting pronouncements. FAS 128
simplifies the standards for computing earnings per share ("EPS") and makes them
comparable to international standards. It replaces the presentation of primary
EPS with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Early adoption of FAS 128 was not permitted, however,
restatement of all prior period EPS data presented was required upon adoption as
of December 31, 1997. See Note 9.
Treasury Stock
The purchase of the Company's common stock is recorded at cost. In the event of
subsequent reissue, the treasury stock account is reduced by the cost of such
stock on the average cost basis, with any excess proceeds credited to additional
paid-in capital. Treasury stock is available for general corporate purposes.
Stock Options
In October, 1995, the FASB issued FAS 123 "Accounting for Stock-Based
Compensation" which is effective for fiscal years beginning after December 15,
1995. FAS 123 provides companies with a choice either to expense the fair value
of employee stock options over the vesting period or to continue the previous
practice of measuring compensation cost under Accounting Principles Board
Opinion 25 but disclose the pro forma effects on net income and earnings per
share had the fair value method been used for options granted in fiscal years
beginning after December 15, 1994. The Company has elected to use the disclosure
only option and record no financial statement expense from the granting of stock
options at fair market value. See Note 10.
Recent Accounting Pronouncements
In June 1996, the FASB issued Statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." FAS 125
provides new accounting and reporting standards for sales, securitizations and
servicing of receivables and other financial assets, for certain secured
borrowing and collateral transactions, and for extinguishments of liabilities.
FAS 125 as amended by FASB Statement No. 127, "Deferral of Effective Date of
Certain Provisions of FAS 125" is generally to be applied to transactions
occurring after December 31, 1996, with certain provisions having been delayed
until 1998. FAS 125 did not materially impact the company's financial position
or results of operations as a result of adoption.
In February 1997, the FASB issued FAS 129, "Disclosure of Information about
Capital Structure," which consolidates existing guidance relating to capital
structure. This standard is effective for reporting periods ending after
December 15, 1997. Adoption of this standard did not change the previous
presentation regarding capital structure.
19
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNT POLICIES (Continued)
In June 1997, the FASB issued FAS 130, "Reporting Comprehensive Income," which
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. The
standard is effective for years beginning after December 15, 1997, and will be
adopted by the Company as of January 1, 1998. Adoption of this standard is not
expected to significantly impact the presentation of the financial statements.
In June 1997, the FASB also issued FAS 131, "Disclosures About Segments of an
Enterprise and Related Information," which supersedes FAS 14. Under FAS 131's
"management approach," public companies will report financial and descriptive
information about their operating segments. FAS 131 is also effective for years
beginning after December 15, 1997, however, because the Company operates in only
one line of business, adoption of FAS 131 will have no impact on the Company's
financial statement presentation.
Reclassification
Certain items previously reported have been reclassified to conform with the
current year's reporting format. These reclassifications had no impact on net
income.
20
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. INVESTMENT SECURITIES
A summary of investment securities available for sale is as follows:
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and agency securities $ 999,556 $ 9,352 $ 1,008,908
Collateralized mortgage obligations 41,411,384 546,681 (56,326) 41,901,739
Municipal obligations 29,630,028 1,517,487 31,147,515
Other debt securities 250,000 8,125 258,125
Mortgage-backed securities 7,501,455 278,133 7,779,588
FHLB stock 2,574,200 2,574,200
Other marketable equity securities 9,901,245 93,689 (6,261) 9,988,673
--------------------------------------------------------------------------
$92,267,868 $2,453,467 $(62,587) $94,658,748
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and agency securities $ 9,598,446 $ 28,642 $ (14,299) $ 9,612,800
Collateralized mortgage obligations 45,760,876 252,108 (147,103) 45,865,881
Municipal obligations 26,909,987 461,373 (87,457) 27,283,903
Other debt securities 250,000 11,563 261,563
Mortgage-backed securities 28,069,974 280,154 (565,358) 27,784,770
FHLB stock 4,289,800 4,289,800
Other marketable equity securities 10,120,936 95,000 (25,891) 10,190,045
--------------------------------------------------------------------------
$125,000,019 $1,128,840 $(840,097) $125,288,762
==========================================================================
</TABLE>
21
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. INVESTMENT SECURITIES (Continued)
The investment portfolio includes fixed and floating rate collateralized
mortgage obligations ("CMOs"). The interest rates on the floating rate CMOs
reset monthly in accordance with changes in the London Interbank Offered Rate
("LIBOR"), and were purchased in conjunction with the Company's interest rate
risk management strategy. An increase in market interest rates may have the
effect of reducing principal prepayments, thus extending the lives of these
securities. Conversely, a decline in market interest rates may increase
principal prepayments, shortening the securities' average lives. This would
increase the overall yield on these CMOs, since they were generally purchased at
discounts.
The amortized cost and fair value of investment securities at December 31, 1997,
by contractual maturity, are shown in the following table. Actual maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties. For purposes
of the maturity table, mortgage-backed securities and CMOs, which are not due at
a single maturity date, have been allocated over maturity groupings based on the
weighted-average contractual maturities of underlying collateral. The
mortgage-backed securities and CMOs may mature earlier than their
weighted-average contractual maturities because of principal prepayments.
<TABLE>
<CAPTION>
Amortized
Debt and mortgage related securities: Cost Fair Value
--------------------------------------
<S> <C> <C>
Due after one year through five years $ 269,834 $ 278,607
Due after five years through ten years 2,568,723 2,634,204
Due after 10 through 20 years 17,669,723 18,562,072
Due after 20 years 59,284,143 60,620,992
--------------------------------------
Total 79,792,423 82,095,875
Marketable equity securities and FHLB stock 12,475,445 12,562,873
--------------------------------------
Total investment securities $92,267,868 $94,658,748
======================================
</TABLE>
The Savings Bank is a member of the FHLB System. As a member, the Savings Bank
maintains an investment in the capital stock of the FHLB of Pittsburgh, at cost,
in an amount not less than 1% of its qualifying assets as defined by the FHLB or
1/20th of its outstanding borrowings, if any, whichever is greater.
During the year ended December 31, 1997, debt securities with fair values of
$16,510,649 were sold resulting in gross gains and losses of $59,946 and
$77,202, respectively. During the year ending December 31, 1996, debt and equity
securities with fair values of $29,679,214 were sold resulting in gross gains
and losses of $246,513 and $59,325, respectively.
Investment securities, with amortized cost and fair values, respectively, of
$9,385,698 and $9,658,749 at December 31, 1997, and of $18,875,096 and
$18,490,771 at December 31, 1996 were pledged as collateral for public unit
deposits and other third party collateral agreements.
22
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3. LOANS
December 31,
1997 1996
---------------------------
First mortgage residential:
One-to-four family residential $172,746,874 $158,817,080
Construction 746,288 1,287,007
---------------------------
173,493,162 160,104,087
Commercial and other real estate 22,230,915 24,753,320
Commercial business 19,515,048 20,944,114
Commercial land and land development 7,349,649 3,488,337
Automobile 18,133,970 32,239,765
Home equity 14,947,568 15,327,772
Other consumer 3,622,586 3,796,998
---------------------------
Gross loans held for investment 259,292,898 260,654,393
Less:
Loans in process 2,662,374 5,114,248
Unearned discounts 82,539 100,115
Net deferred fees 731,335 261,344
Allowance for losses 3,235,039 2,867,270
---------------------------
Net loans held for investment 252,581,611 252,311,416
Education loans held for sale 3,424,327 3,458,286
---------------------------
$256,005,938 $255,769,702
===========================
Activity in the allowance for loan losses is summarized as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 2,867,270 $ 2,471,658 $ 2,699,632
Provision charged to income - mortgage 120,000 256
Provision charged to income - commercial 246,284 300,000 585,000
Provision charged to income - consumer 406,296 598,479 332,608
Charge-offs - commercial (36,011) (60,000) (856,634)
Charge-offs - consumer (411,287) (486,642) (326,687)
Recoveries - consumer 42,487 43,775 37,483
-----------------------------------------
Balance at end of year $ 3,235,039 $ 2,867,270 $ 2,471,658
=========================================
The allowance for loan losses at December 31 consisted of:
Mortgage $ 452,000 $ 332,000 $ 332,000
Commercial 1,304,073 1,093,800 853,800
Consumer 1,478,966 1,441,470 1,285,858
-----------------------------------------
$ 3,235,039 $ 2,867,270 $ 2,471,658
=========================================
</TABLE>
23
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3. LOANS (Continued)
The estimated fair value of education loans held for sale approximates book
value. Gains on sales of education loans were $33,595, $34,714, and $33,853 in
1997, 1996 and 1995, respectively.
Loans serviced for others totalled $1,567,619, $1,101,591 and $699,379 at
December 31, 1997, 1996 and 1995, respectively, which generated fee income of
$1,471, $867 and $1,488, respectively. Loans serviced by others totalled
$11,314,458, and $12,518,218 at December 31, 1997, and 1996, respectively. The
Company's loan portfolio is geographically diversified, being in 21 states as of
December 31, 1997.
The Company held two loans with a combined balance of $2.77 million at December
31, 1997, and one loan with a balance of $1.76 million at December 31, 1996,
which were considered impaired. Because the market values of the collateral
securing these loans exceed the loans' recorded balances, no specific loss
reserves are deemed necessary; however, the loans have been included in
management's assessment of the adequacy of general valuation allowances. The
loan which was considered impaired at both year-end dates, has not been placed
on non-accrual status, nor does management expect it to be in the foreseeable
future. The loan which was only considered impaired at December 31, 1997, was
placed on non-accrual status during the fourth quarter of 1997. The average
recorded investment in impaired loans during the years ended December 31, 1997
and 1996, was approximately $1.98 million and $1.78 million, respectively, while
$137,000 and $141,000 was recorded in interest income on impaired loans during
those years.
Loans which the Company considers non-performing due to being placed on
non-accrual status as a result of being in arrears three months or more are as
follows:
<TABLE>
<CAPTION>
Year Number of loans Balance Percent of loans held for investment
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 123 $2,774,357 1.10%
1996 92 $1,013,103 0.40%
</TABLE>
The foregone interest on non-performing loans for the years ended December 31,
1997, 1996, and 1995 was $148,651, $41,709 and $34,933, respectively. Interest
received in cash of $171,935, $69,879, and $45,535 on non-accrual loans is
included in income in 1997, 1996, and 1995, respectively.
At December 31, 1997 and 1996, respectively, the Company was committed under
various agreements to originate first mortgage residential loans of $1,467,390
and $1,455,100, commercial and other real estate loans of $5,335,693 and
$1,974,326, and consumer loans of $42,230 and $1,045,229 and had $3,055,868 and
$4,791,600 in unused commercial lines of credit, $2,145,495 and $2,115,569 in
commercial letters of credit issued, $6,517,403 and $6,163,578 in unused home
equity lines of credit, $2,011,914 and $2,021,514 in unused personal unsecured
lines of credit and $590,047 and $486,369 in unused credit card lines. There
were no commitments to lend additional funds to debtors whose loans with the
Company were non-performing as of December 31, 1997 or 1996.
NOTE 4. REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS
REO and other repossessed assets are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
--------------------------
<S> <C> <C>
Acquired in foreclosure or deed in lieu of foreclosure $ 1,094,477 $ 705,881
Other repossessed assets 21,856 30,971
Allowance for REO and other repossessed asset losses (5,000)
--------------------------
$ 1,111,333 $ 736,852
==========================
</TABLE>
24
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS (Continued)
The following is an analysis of the allowance for REO and other repossessed
asset losses:
Year Ended December 31,
1997 1996 1995
-----------------------------------
Balance at beginning of year $ 0 $ 0 $ 0
Provisions charged to income 11,782 133,551 12,492
Charge-offs (44,591) (168,516) (84,044)
Recoveries 37,809 34,965 71,552
-----------------------------------
Balance at end of year $ 5,000 $ 0 $ 0
===================================
NOTE 5. PREMISES AND EQUIPMENT
Premises and equipment are as follows:
December 31,
1997 1996
-----------------------
Land and land improvements $ 597,553 $ 578,998
Buildings 6,052,638 5,001,669
Leasehold improvements 61,997 21,780
Furniture and equipment 2,402,204 1,934,407
Construction in progress 24,708 388,107
-----------------------
9,139,100 7,924,961
Less accumulated depreciation 4,008,074 3,624,434
-----------------------
$5,131,026 $4,300,527
=======================
The Company is committed under a number of non-cancelable operating leases for
facilities and equipment with initial or remaining terms in excess of one year.
The Neshannock Township, Shenango Township, and Union Township branches are
constructed on leased land.
<TABLE>
<CAPTION>
Branch Annual Rental Expiration Date Renewal Options
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Neshannock Township $2,500 10/31/22 None
Shenango Township 23,000 07/31/99 Seven, 5-year options
Union Township 19,980 08/31/07 Six, 5-year options
</TABLE>
The future minimum rental payments required under non-cancelable operating
leases with initial or remaining terms in excess of one year as of December 31,
1997 are as follows: 1998 - $45,480, 1999 - $35,897, 2000 - $22,480, 2001 -
$22,480, 2002 - $22,480 and subsequent years - $132,833. Total rental expense
for all operating leases for 1997, 1996 and 1995 was $55,985, $53,928 and
$56,058, respectively.
25
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6. DEPOSITS
Deposit account balances are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
----------------------------------------------------------------
Stated
Rate Amount % Amount %
-----------------------------------------------------------------------------
<S> <S> <C> <C> <C> <C>
Non-interest-bearing demand deposits: $ 4,971,054 1.81 $ 4,647,926 1.74
Interest-bearing deposits:
NOW deposits 26,916,213 9.78 25,750,252 9.62
Money market deposits 20,745,913 7.54 18,335,286 6.85
Savings deposits 55,919,113 20.32 59,558,081 22.25
Club deposits 232,023 0.08 239,567 0.09
Certificates 0.00-4.00% 687,315 0.25 1,220,331 0.46
4.01-6.00% 79,588,749 28.92 103,833,034 38.80
6.01-8.00% 69,252,911 25.16 35,198,534 13.15
8.01-10.00% 16,808,803 6.11 18,717,823 6.99
----------------------------------------------------------------
275,122,094 99.97 267,500,834 99.95
Accrued interest on certificates 98,937 0.03 118,342 0.05
----------------------------------------------------------------
$275,221,031 100.00 $267,619,176 100.00
================================================================
</TABLE>
A summary of certificates by maturity is as follows:
December 31,
1997 1996
----------------------------
0 - 1 Year $ 80,205,766 $ 76,154,716
1 - 2 Years 58,787,175 38,272,971
2 - 3 Years 6,030,558 23,900,635
3 - 4 Years 7,833,043 4,833,236
4 - 5 Years 3,780,941 7,228,342
Thereafter 9,700,295 8,579,822
----------------------------
166,337,778 158,969,722
Accrued interest 98,937 118,342
----------------------------
$166,436,715 $159,088,064
============================
The aggregate of all deposits over $100,000 amounted to $28,780,114 and
$31,854,274 at December 31, 1997 and 1996, respectively.
Interest on deposits is summarized as follows:
Year Ended December 31,
1997 1996 1995
--------------------------------------------
Money market and NOW deposits $ 1,346,537 $ 1,051,885 $ 860,111
Savings and club deposits 1,558,815 1,655,368 1,763,451
Certificates of deposit 9,709,911 9,134,262 9,042,574
Interest forfeitures (33,396) (26,106) (22,837)
--------------------------------------------
$ 12,581,867 $ 11,815,409 $ 11,643,299
============================================
26
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
Advances from the FHLB at December 31 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------------------
Interest Interest
Balance Rate Balance Rate
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due within one year $26,000,000 5.39%-5.63% $69,530,000 5.34%-6.76%
Due within two years 21,143,000 5.50%-6.13% 5,000,000 5.39%
Due within three years 11,143,000 5.50%-6.13%
Due after five years 339,061 5.97%-6.94% 121,335 6.94%
-------------- --------------
Total $47,482,061 $85,794,335
============== ==============
Weighted average interest rate at
end of period 5.67% 6.06%
=========== ==========
</TABLE>
The Savings Bank has a line of credit and a repurchase agreement with the FHLB.
The total amount of credit available to the Savings Bank through these products
was approximately $18,297,000 and $50,000,000 at December 31, 1997,
respectively, and the outstanding balances were $0 and $21,000,000. The balances
are due on demand and the interest rates may change daily. Borrowings from the
FHLB are secured by the Savings Bank's stock in the FHLB and other qualifying
assets. The Savings Bank's maximum borrowing capacity from the FHLB was
approximately $172,567,000 at December 31, 1997.
Other borrowings at December 31, 1997 and 1996 consist of $242,537 and $660,876
in uninsured investment agreements between the Savings Bank and certain
commercial customers. The interest rate on these agreements resets weekly based
on changes in the federal funds rate less a negotiated margin. Securities with a
market value of approximately $1,365,000 and $987,000 at December 31, 1997 and
1996, respectively, were pledged as collateral for these borrowings.
NOTE 8. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
Year Ended December 31,
1997 1996 1995
-----------------------------------------
Federal:
Current $ 1,986,850 $ 1,530,150 $ 1,620,250
Deferred (232,000) (150,000) (18,000)
-----------------------------------------
1,754,850 1,380,150 1,602,250
State:
Current 438,825 285,225 304,175
-----------------------------------------
$ 2,193,675 $ 1,665,375 $ 1,906,425
=========================================
Income tax expense (benefit) of the Company differs from the amounts computed by
applying the statutory U.S. federal income tax rate of 34 percent to income
before income taxes because of the following:
Percent of Pretax Income
Year Ended December 31,
1997 1996 1995
-----------------------------
Federal statutory rate 34.00% 34.00% 34.00%
Tax free income (6.99%) (5.47%) (4.36%)
State income tax expense, net of federal income
tax 4.27% 4.03% 4.03%
Qualified dividend received exclusion (0.52%) (0.68%) (0.19%)
Other items, net 1.60% 3.74% 4.76%
-----------------------------
32.36% 35.62% 38.24%
=============================
27
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE: 8. INCOME TAXES (Continued)
Included in other liabilities at December 31, 1997 and in other assets at
December 31, 1996, are a net deferred tax liability and asset of $242,000 and
$241,000, respectively. The tax effects of the temporary differences that
comprise the net deferred tax asset and liability are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for losses on loans $ 899,000 $ 800,000
Other 128,000 82,000
--------------------------
Total deferred tax assets 1,027,000 882,000
Deferred tax liabilities:
Net unrealized gain on investments available for sale 813,000 98,000
Deferred loan income 181,000 251,000
Depreciation expense 95,000 112,000
Other 180,000 180,000
--------------------------
Total deferred tax liabilities 1,269,000 641,000
--------------------------
Net deferred tax (liability) asset ($ 242,000) $ 241,000
==========================
</TABLE>
Retained earnings at December 31, 1997, include financial statement tax bad debt
reserves of $8,263,000. The Small Business Job Protection Act of 1996 passed on
August 20, 1996 eliminated the special bad debt deduction previously granted
solely to thrifts. This results in the recapture of past taxes for permanent
deductions arising from the "applicable excess reserve," which is the total
amount of the Savings Bank's reserve over its base year reserve as of December
31, 1987. Because the Savings Bank had no "applicable excess reserve," no
recapture tax exists.
The Savings Bank is subject to the Pennsylvania Mutual Thrift Institution Tax
which is currently calculated at 11.50% of earnings based on generally accepted
accounting principles with certain adjustments.
NOTE 9. EARNINGS PER SHARE
Earnings per share for the years ended December 31, 1997, 1996, and 1995, were
calculated as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Net Income $ 4,585,690 $ 3,009,997 $ 3,079,186
=========================================
Weighted average common shares issued 2,343,098 2,343,098 2,343,098
Average unallocated ESOP shares (66,339) (74,863) (87,177)
Average unvested and forfeited MSBP shares (14,742) (31,940) (50,066)
Weighted average treasury shares (276,789) (78,614) (25,223)
-----------------------------------------
Weighted common shares outstanding - basic 1,985,228 2,157,681 2,180,632
=========================================
Basic earnings per share $ 2.31 $ 1.40 $ 1.41
=========================================
Weighted common shares outstanding - basic 1,985,228 2,157,681 2,180,632
Average unvested MSBP shares 4,375 21,469 37,076
Net effect of dilutive stock options 60,110 62,084 55,208
-----------------------------------------
Weighted common shares outstanding - diluted 2,049,713 2,241,234 2,272,916
=========================================
Diluted earnings per share $ 2.24 $ 1.34 $ 1.35
=========================================
</TABLE>
28
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. STOCK BENEFIT PLANS
Stock Option Plan:
Pursuant to the Company's stock option and incentive plan ("Option Plan"),
options for up to 224,825 shares of the Company's stock may be granted to
directors and officers of the Savings Bank. Options granted under the Option
Plan may be either incentive or non-incentive stock options. All options have 10
year terms, and vest and become exercisable 25% per year.
For options granted beginning in 1995, pro forma information regarding net
income and earnings per share is required by FAS 123, and has been determined as
if the Company had accounted for its stock options under the fair value method
of that Statement. The fair value for these options was estimated at the date of
the grant using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rate of 6.42%, dividend yield of 2.31%, a
volatility factor of the expected market price of the Company's common stock of
.152, and an expected life of the options of 7.20 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Under FAS 123, the
Company's net income for 1997 and 1996 would have been $4,581,610 and
$3,009,056, respectively. Basic and diluted earnings per share for 1997 would
have been $2.31 and $2.24, respectively, and basic and diluted earnings per
share for 1996 would have been $1.39 and $1.34, respectively.
A summary of the Company's stock option activity and related information for the
years ended December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 146,887 $ 10.37 150,446 $ 10.00 160,472 $ 10.00
Granted 5,000 20.75
Forfeited 3,212 10.00 7,026 10.00
Exercised 37,813 10.00 5,347 10.00 3,000 10.00
-------------------------------------------------------------------------------------
Outstanding at end of year 109,074 $ 10.49 146,887 $ 10.37 150,446 $ 10.00
=====================================================================================
</TABLE>
Options granted in 1996 have an exercise price of $20.75 and expire in 2006. All
other options have an exercise price of $10.00 and expire in 2003. At December
31, 1997, 104,074 options were exercisable at $10.00 per share and 1,250 options
were exercisable at $20.75 per share.
Employee Stock Ownership Plan:
The Company has an ESOP for the benefit of employees who meet the eligibility
requirements which include having completed one year of service with the Savings
Bank and having attained age 21. The ESOP Trust purchased 112,412 shares of
common stock in the Company's initial public offering with proceeds from a loan
from the Company. The Savings Bank makes cash contributions to the ESOP on an
annual basis sufficient to enable the ESOP to make the required loan payments to
the Company.
The note payable referred to above bears interest at prime rate plus one
percent, adjustable quarterly, with interest payable quarterly and principal
payable in equal annual installments over ten years. The loan is secured by the
shares of the stock purchased.
29
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. STOCK BENEFIT PLANS (Continued)
The Company accounts for its ESOP in accordance with Statement of Position 93-6.
As the debt is repaid, shares are released from collateral and allocated to
qualified employees based on the proportion of debt service paid in the year.
Accordingly, the shares pledged as collateral are reported as deferred ESOP
shares in the statement of financial position. As shares are released from
collateral, the Company reports compensation expense equal to the current market
price of the shares, and the shares become outstanding for earnings per share
computations. Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings; dividends on unallocated ESOP shares are recorded as a
reduction of debt.
Deferred compensation expense for the ESOP was $310,216, $240,829 and $215,605
for the years ended December 31, 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Allocated shares 42,099 31,853 23,157
Shares released for allocation 11,241 11,428 11,457
Shares distributed (1,962) (1,182) (2,761)
Unreleased shares 55,129 66,370 77,798
-----------------------------------------
Total ESOP shares 106,507 108,469 109,651
=========================================
Fair value of unreleased shares at December 31 $ 2,040,000 $ 1,493,000 $ 1,595,000
=========================================
</TABLE>
Management Stock Bonus Plans ("MSBPs"):
The Company and Savings Bank adopted MSBPs for Directors and Management. A total
of 89,930 shares of restricted stock were awarded on April 5, 1993, the
conversion date, in the form of restricted stock payable over a four year
vesting period, at 25 percent per year, beginning April 5, 1994. The MSBPs
shares purchased in the conversion were initially excluded from shareholders'
equity. The Company recognizes compensation expense in the amount of the fair
market value of the common stock at the grant date, pro rata over the years
during which the shares are payable and recorded as an addition to shareholders'
equity. Compensation expense attributable to the MSBPs amounted to $11,297 in
1997, $60,695 in 1996 and $85,284 in 1995. The shares are entitled to all voting
and other shareholder rights, except that the shares, while restricted, cannot
be sold, pledged or otherwise disposed of, and are required to be held in
escrow.
If a holder of restricted stock under the MSBPs terminates employment for
reasons other than death, disability, retirement or change in control in the
Company, such employee forfeits all rights to any allocated shares which are
still restricted. If termination is caused by death, disability, retirement or
change in control of the Company, all allocated shares become unrestricted.
The following table summarizes the MSBPs activity for the periods indicated:
1997 1996 1995
----------------------------
Restricted shares at beginning of year 16,807 36,324 58,553
Shares vested 16,807 18,162 22,229
Shares forfeited 1,355
----------------------------
Restricted shares at end of year 0 16,807 36,324
============================
Forfeited shares have been placed in the plan reserve and are eligible for
reallocation at the direction of the Plan Trustees.
30
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. PENSION PLAN
The Savings Bank has a defined benefit pension plan covering all of its
qualified full-time employees. The Savings Bank's funding policy is to
contribute annually the maximum amount that can be deducted for federal income
tax purposes. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future.
The pension plan provides for monthly payments to each participating employee at
normal retirement age (age 65). The annual benefits payable under the pension
plan are equal to 1.25% of Final Average Compensation ("FAC") as defined in the
plan, excluding overtime, commission and bonus pay multiplied by years of
service.
For the periods through December 31, 1994, the Savings Bank was the sponsor of a
single employer plan for the benefit of its employees. Effective January 1,
1995, the Savings Bank changed administrators of this plan and pooled the assets
and liabilities of the plan with a multiemployer plan in which the Savings Bank
participates with a number of other financial institutions. This plan invests
primarily in fixed income and equity securities, both domestic and
international. The qualifications for employees to participate in the
multiemployer plan and the benefits which they will be entitled to receive upon
retirement are substantially the same as under the single employer plan. The
Savings Bank did not receive a reversion of any assets from the plan as a result
of this change. The Savings Bank expects to benefit from this change through
reduced future contributions, and thus, reduced charges to earnings, due to the
overfunded status of the multiemployer plan. Pension expense for 1997, 1996 and
1995 was $0, $0 and $48,637, respectively.
The Company established a qualified plan under Section 401(k) of the Internal
Revenue Code for substantially all of its employees which allows participants to
make contributions by salary reduction equal to or less than 9% of gross annual
salary. The Company matches contributions equal to 50% of the employee's
contributions, up to 4% of compensation. The Company's contributions to the plan
in 1997, 1996 and 1995 were $28,793, $24,090 and $21,436, respectively.
During 1993, the Company adopted a supplemental executive retirement plan
("SERP") for the benefit of the President. The purpose of the SERP is to furnish
the President with supplemental post-retirement benefits in addition to those
which will be provided under the Company's pension plan and other retirement
benefits. Benefits payable under the SERP are anticipated to equal approximately
$1,000 per month upon retirement at age 65 for a minimum of 120 months. Payments
under the SERP are being accrued for financial reporting purposes during the
period of the President's employment. The SERP is unfunded. All benefits payable
under the SERP will be paid from current assets of the Company. There are no tax
consequences to either the President or the Company prior to payment of
benefits. Upon payment of benefits, the Company will be entitled to recognize a
tax deductible compensation expense. The Company's expenses for 1997, 1996 and
1995 were $10,030, $28,997 and $32,389 offset by deferred taxes of approximately
$3,000, $10,000 and $11,000, respectively.
NOTE 12. SHAREHOLDERS' EQUITY
The Savings Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Savings Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Savings Bank must meet specific capital guidelines that involve quantitative
measures of the Savings Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Savings Bank's capital amounts and classification are also subject to
qualitative judgements by the regulators about components, risk weightings and
other factors.
The Savings Bank may not declare or pay cash dividends if the effect would be to
reduce shareholder's equity below applicable regulatory capital requirements or
if such declaration and payment would otherwise violate regulatory requirements.
Quantitative measures established by regulation to ensure capital adequacy
require the Savings Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined). Management believes, as of December 31, 1997,
that the Savings Bank met all capital adequacy requirements to which it was
subject.
To be categorized as well capitalized, the Savings Bank must maintain minimum
ratios as set forth in the table. As of December 31, 1997, the most recent
notification from the Office of Thrift Supervision categorized the Savings Bank
as well capitalized under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that management
believes have changed the institution's category.
31
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. SHAREHOLDERS' EQUITY (Continued)
<TABLE>
<CAPTION>
December 31, 1997 (1) December 31, 1996 (1)
-------------------------------------------------------------------------------
Tier I Tier I Tier II Tier I Tier I Tier II
Core Risk--Based Risk--Based Core Risk--Based Risk--Based
Capital Capital Capital Capital Capital Capital
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Equity capital (2) $ 40,033 $ 40,033 $ 40,033 $ 33,963 $ 33,963 $ 33,963
Non--includable portion of investment in (26) (26) (26)
subsidiary (24) (24) (24)
Unrealized gain on certain securities available (1,577) (1,577) (1,577)
for sale (200) (200) (200)
General valuation allowances (3) 2,533 2,659
-------------------------------------------------------------------------------
Regulatory capital 38,430 38,430 40,963 33,739 33,739 36,398
Minimum capital requirement 14,752 8,091 16,182 16,015 8,508 17,016
-------------------------------------------------------------------------------
Excess regulatory capital $ 23,678 $ 30,339 $ 24,781 $ 17,724 $ 25,231 $ 19,382
===============================================================================
Adjusted total assets $ 368,801 $ 202,272 $ 202,272 $ 400,371 $ 212,702 $ 212,702
Regulatory capital as a percentage 10.42% 19.00% 20.25% 8.43% 15.86% 17.11%
Minimum capital requirement as a percentage 4.00% 4.00% 8.00% 4.00% 4.00% 8.00%
-------------------------------------------------------------------------------
Excess regulatory capital as a percentage 6.42% 15.00% 12.25% 4.43% 11.86% 9.11%
===============================================================================
Well capitalized requirement as a percentage 5.00% 6.00% 10.00% 5.00% 6.00% 10.00%
===============================================================================
</TABLE>
(1) Dollar amounts in thousands.
(2) Represents equity capital of the consolidated Savings Bank as reported to
the OTS on Form 1313.
(3) Limited to 1.25% of risk--based assets.
NOTE 13. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of FAS No. 107, "Disclosures about Fair Value of Financial
Instruments" ("Statement 107"), requires that the Company disclose estimated
fair values for its financial instruments. The market value of investments and
mortgage-backed securities, as presented in Note 2, are based primarily upon
quoted market prices. For substantially all other financial instruments, the
fair values are management's estimates of the values at which the instruments
could be exchanged in a transaction between willing parties. In accordance with
Statement 107, fair values are based on estimates using present value and other
valuation techniques in instances where quoted prices are not available. These
techniques are significantly affected by the assumptions used, including
discount rates and estimates of future cash flows. As such, the derived fair
value estimates cannot be substantiated by comparison to independent markets
and, further, may not be realizable in an immediate settlement of the
instruments. Statement 107 also excludes certain items from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent, and should not be construed to represent, the underlying value of the
Company.
Fair value estimates, methods and assumptions are set forth below for the
Company's financial instruments.
Cash and cash equivalents: The carrying amounts reported on the balance sheet
for cash and cash equivalents approximate those assets' fair value.
Investment securities, including mortgage-backed securities: Fair values are
based on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted prices of comparable instruments.
(See Note 2.)
Loans: For variable rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair values
for all other loans are estimated using discounted cash flow analysis, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality.
Deposit liabilities: The fair values disclosed for NOW, money market, and
savings deposits are, by definition, equal to the amount payable on demand at
the reporting date (i.e. their carrying amounts). The carrying amounts for
variable rate certificates of deposit and for those certificates of deposit
maturing in less than one year approximate their fair values at the reporting
date. Fair values for
32
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
fixed-rate certificates of deposit are estimated using a discounted cash flow
analysis, applying interest rates currently being offered on certificates to a
schedule of aggregate expected monthly maturities on those deposits.
Borrowings: Fair values for the Company's variable rate FHLB advances and other
borrowings are deemed to equal carrying value. Fair values for fixed rate
borrowings are estimated using a discounted cash flow analysis similar to that
used in valuing fixed rate deposit liabilities.
Off-balance sheet instruments: Fair values for the Company's commitments to
extend credit would be based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements.
Presently, the Company only charges a nominal loan commitment fee and,
accordingly, there is no fair value associated with loan commitments. The fair
value of the commitment to purchase loans is based on fees currently charged to
enter into similar agreements.
The following table presents the estimates of fair value of financial
instruments:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
--------------------------------- -----------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------------- ---------------- ------------------ ----------------
ASSETS:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 15,648,757 $ 15,648,757 $ 16,734,483 $ 16,734,483
Investment securities available for sale 94,658,748 94,658,748 125,288,762 125,288,762
Loans receivable, net 256,005,938 259,097,041 255,769,702 257,895,385
LIABILITIES:
Deposits 275,221,031 272,574,727 267,619,176 264,553,152
FHLB advances and other borrowings 47,724,598 47,748,797 86,455,211 86,483,337
Advance payments by borrowers 1,876,095 1,876,095 1,600,202 1,600,202
</TABLE>
NOTE 14. LOANS TO RELATED PARTIES
The Company has granted loans to the officers and directors of the Company and
to their associates. Related party loans are made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with unrelated persons and do not involve more than
normal risk of collectibility. The aggregate dollar amount of these loans was
$435,693 and $263,242 at December 31, 1997 and 1996, respectively. During 1997
and 1996, $45,000 and $170,000 in new loans were made and $58,339 and $63,757
were advanced under existing lines of credit. The $170,000 approved during 1996
was disbursed in 1997. Repayments totalled $100,888 and $76,368 in 1997 and
1996, respectively.
NOTE 15. DERIVATIVE FINANCIAL INSTRUMENTS
In October 1994, the FASB issued FAS 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments," which is generally
effective for calendar year 1994 financial statements. The Company, Savings Bank
and its subsidiary have not historically invested in instruments which are
typically described as derivative financial instruments, and have no current
plans to do so, for trading, investing, hedging or other purposes. Instruments
of this type include future, forward, swap and option contracts, and interest
rate caps and floors.
FAS 119 expanded the definition of derivative financial instruments for
disclosure purposes to include certain other instruments in addition to the
above items, including commitments to originate loans and unsettled security
purchase or sale agreements. The Company and the Savings Bank enter into these
types of agreements in the normal course of business for investment purposes.
The Company, Savings Bank and its subsidiary are not currently involved in
trading or hedging activities, and have no current plans to do so.
33
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 16. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
Quarterly Consolidated Statements of Operations
(Amounts in Thousands, Except Per Share Data and Dividends)
<TABLE>
<CAPTION>
Year Year
Three Months Ended Ended Three Months Ended Ended
------------------ ----- ------------------ -----
March June Sept. Dec. Dec. March June Sept. Dec. Dec.
1996 1996 1996 1996 1996 1997 1997 1997 1997 1997
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest income $ 6,447 $ 6,711 $ 7,130 $ 7,322 $ 27,610 $ 7,433 $ 7,468 $ 7,558 $ 7,101 $ 29,560
Total interest expense 3,484 3,570 3,848 4,058 14,960 4,245 4,254 4,345 4,118 16,962
--------------------------------------------------------------------------------------------------------
Net interest income 2,963 3,141 3,282 3,264 12,650 3,188 3,214 3,213 2,983 12,598
Provision for loan losses 225 224 225 225 899 185 195 195 198 773
--------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 2,738 2,917 3,057 3,039 11,751 3,003 3,019 3,018 2,785 11,825
Total non-interest income 399 149 253 227 1,028 204 178 204 204 790
Total non-interest expense 1,620 1,601 3,290 1,593 8,104 1,463 1,435 1,482 1,455 5,835
--------------------------------------------------------------------------------------------------------
Income before taxes 1,517 1,465 20 1,673 4,675 1,744 1,762 1,740 1,534 6,780
Income taxes 569 566 10 520 1,665 607 555 562 470 2,194
--------------------------------------------------------------------------------------------------------
Net income $ 948 $ 899 $ 10 $ 1,153 $ 3,010 $ 1,137 $ 1,207 $ 1,178 $ 1,064 $ 4,586
========================================================================================================
Earnings per share - basic $ 0.43 $ 0.41 $ 0.00 $ 0.55 $ 1.40 $ 0.58 $ 0.61 $ 0.59 $ 0.53 $ 2.31
Earnings per share - diluted $ 0.41 $ 0.39 $ 0.00 $ 0.53 $ 1.34 $ 0.55 $ 0.59 $ 0.57 $ 0.52 $ 2.24
Dividends declared 223,020 264,480 262,869 239,225 989,594 239,665 300,865 300,395 302,082 1,143,007
Common shares outstanding 2,302 2,271 2,258 2,060 N/A 2,063 2,071 2,069 2,069 N/A
</TABLE>
34
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 17. CONDENSED FINANCIAL INFORMATION OF FIRST SHENANGO BANCORP, INC. (PARENT
ONLY)
First Shenango Bancorp, Inc. was organized on December 9, 1992, and began
operations on April 5, 1993. The Company's balance sheets as of December 31,
1997 and 1996, and related statements of income and cash flows for the years
ending December 31, 1997, 1996, and 1995 are as follows:
BALANCE SHEET 1997 1996
- -----------------------------------------------------------------------
Assets
Cash and cash equivalents $ 624,393 $ 1,793,796
Investments in:
Securities 3,352,149 3,346,286
Savings Bank 40,032,561 33,963,525
Loans receivable from Savings Bank 3,551,288 4,063,699
Commercial loan 665,900 197,796
Other assets 27,117 36,630
----------- -----------
Total Assets $48,253,408 $43,401,732
=========== ===========
Liabilities and Shareholders' Equity
Accrued expenses and other liabilities $ 89,016 $ 108,180
Dividends payable 302,082 239,225
----------- -----------
Total Liabilities 391,098 347,405
Total Shareholders' Equity 47,862,310 43,054,327
----------- -----------
Total Liabilities and Shareholders' Equity $48,253,408 $43,401,732
=========== ===========
<TABLE>
<CAPTION>
STATEMENT OF INCOME 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 299,886 $ 354,318 $ 353,093
Interest on loans to Savings Bank 253,484 263,818 302,963
Dividend from Savings Bank 5,000,000 1,000,000
Loss on sale of investments 1,563
Expenses 120,636 91,391 147,528
----------- ----------- -----------
Income before equity earnings and income tax 432,734 5,525,182 1,508,528
Income tax expense 176,500 213,250 206,500
----------- ----------- -----------
Net Income before Equity Earnings 256,234 5,311,932 1,302,028
Equity in (excess dividends from) undistributed earnings
of Savings Bank 4,329,456 (2,301,935) 1,777,158
----------- ----------- -----------
Net Income $ 4,585,690 $ 3,009,997 $ 3,079,186
=========== =========== ===========
</TABLE>
35
<PAGE>
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 17. CONDENSED FINANCIAL INFORMATION OF FIRST SHENANGO BANCORP, INC. (PARENT
ONLY) (Continued)
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 4,585,690 $ 3,009,997 $ 3,079,186
Loss on sale of investments 1,563
(Equity in undistributed earnings of) excess dividends from Savings Bank (4,329,456) 2,301,935 (1,777,158)
Change in other assets and liabilities (9,644) 45,973 51,875
-------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 246,590 5,359,468 1,353,903
INVESTING ACTIVITIES:
Loans to Savings Bank, net of repayments 512,411 114,285 (3,285,433)
Commercial loan originations, net of repayments (468,104) 134,604 57,600
Purchases of investments (2,100,000)
Proceeds from sales of investments 1,998,437
Proceeds from maturities of investments 3,000,128
-------------------------------------------
NET CASH PROVIDED BY (USED BY) INVESTING ACTIVITIES 44,307 147,326 (227,705)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 378,130 53,470 30,000
Purchase of treasury stock (722,433) (5,937,531) (419,024)
Cash dividends on common stock (1,115,997) (1,007,688) (812,112)
-------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES (1,460,300) (6,891,749) (1,201,136)
-------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,169,403) (1,384,955) (74,938)
Cash and cash equivalents at beginning of year 1,793,796 3,178,751 3,253,689
-------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 624,393 $ 1,793,796 $ 3,178,751
===========================================
</TABLE>
NOTE 18. SUBSEQUENT EVENT
On February 6, 1998, the Company entered into an Agreement of Affiliation and
Plan of Merger (the "Agreement") with FirstFederal Financial Services Corp.
("FFSW") of Wooster, Ohio. Under the terms of the Agreement, the Company will
merge with and into FFSW, with the Company's shareholders to receive 1.143
shares of FFSW common stock in exchange for each of their shares of the
Company's common stock. FFSW is a bank holding company with total assets of
$1.46 billion at December 31, 1997. The transaction, which will be accounted for
as a pooling of interests, is subject to regulatory and shareholder approvals
and is expected to be completed in the third quarter of 1998.
36
<PAGE>
================================================================================
SHAREHOLDER INFORMATION
================================================================================
- --------------------------------------------------------------------------------
ANNUAL MEETING
The Annual Meeting of Shareholders of First Shenango Bancorp, Inc. will be held
in the lobby of the Corporate Headquarters on Tuesday, May 26, 1998, at 4:00
p.m.
STOCK DATA
First Shenango Bancorp, Inc. common stock is traded on the Nasdaq National
Market System under the symbol "SHEN."
Information regarding First Shenango stock activity is reported in The Wall
Street Journal under the symbol FstShenango "SHEN."
Analysis of Stock Activity and Dividend Information:
<TABLE>
<CAPTION>
Dividends
For the Quarter Ended High Low Close Declared
---- --- ----- --------
1996
----
<S> <C> <C> <C> <C>
First Quarter $21.50 $20.50 $20.56 $0.10
Second Quarter 21.50 20.00 20.25 0.12
Third Quarter 21.50 20.00 21.00 0.12
Fourth Quarter 23.75 20.50 22.50 0.12
1997
----
First Quarter $25.75 $22.00 $22.25 $0.12
Second Quarter 26.75 21.75 26.25 0.15
Third Quarter 31.75 25.50 31.50 0.15
Fourth Quarter 37.00 30.50 37.00 0.15
</TABLE>
There were seven Nasdaq Market Makers in First Shenango's common stock as of
December 31, 1997: Parker/Hunter, Inc.; Legg Mason Wood Walker, Inc.; Sandler
O'Neill & Partners; Ryan Beck & Company, Inc.; Herzog, Heine, Geduld, Inc.;
Ferris Baker Watts, Inc.; and F. J. Morrissey & Co., Inc.
According to the records of the Company's transfer agent, there were 1,948
shareholders of record at December 31, 1997. This does not include any persons
or entities who hold their stock in nominee or "street name" through various
brokerage firms.
INFORMATION REQUEST
The First Shenango Bancorp, Inc. Annual Report to the Securities and Exchange
Commission on Form 10-K will be available on or about March 31, 1998.
Shareholders and others may obtain one copy of the Form 10-K at no charge and
may request other financial information or reports by writing to:
Lonny D. Robinson
Vice President, Chief Financial Officer and Treasurer
First Shenango Bancorp, Inc.
P. O. Box 671
New Castle, PA 16103
- --------------------------------------------------------------------------------
37
<PAGE>
================================================================================
FIRST SHENANGO BANCORP, INC. 1997 ANNUAL REPORT
================================================================================
<TABLE>
<CAPTION>
<S> <C> <C>
Board of
Robert H. Carlson* Directors Francis A. Bonadio
Chairman of the Board President and Chief Executive Officer
Retired President and Chief Executive Officer First Shenango Bancorp, Inc. and
Universal-Rundle Corp., New Castle, PA First Federal Savings Bank of New Castle
(Plumbing Fixture Manufacturer)
Ronald P. Bergey* William G. Eckles, II
Professor of Accounting Retired President and Chief Executive Officer
Westminster College, New Wilmington, PA W.G. Eckles Co., New Castle, PA
(College) (Architectural Firm)
R. Joseph Hrach Dale R. Perelman*
President President and Chief Executive Officer
Pennsylvania Power Co., New Castle, PA King's Jewelry, New Castle, PA
(Utility) (Jewelry Chain)
Richard E. Rentz, Jr. Director Emeritus
Consultant Albert J. Genkinger
New Castle, PA Retired President
First Federal Savings Bank of New Castle
*Member of
Audit Committee
Executive
Officers
Francis A. Bonadio Lonny D. Robinson
President and Chief Executive Officer Vice President, Chief Financial Officer and Treasurer
E. Waneata
VanKirk
Corporate
Secretary
Transfer Agent Legal Counsel
ChaseMellon Shareholder Services, LLC Gamble, Mojock, Piccione, Acker and Palmer
85 Challenger Road First Federal Plaza
Overpeck Centre 25 North Mill Street
Ridgefield Park, NJ 07660 New Castle, PA 16101
(800) 756-3353 (724) 658-2000
Independent Auditors Special Counsel
Ernst & Young LLP Malizia, Spidi, Sloane & Fisch, P.C.
One Oxford Centre One Franklin Square, 1301 K Street, N.W.
Pittsburgh, PA 15219 Suite 700, East
(412) 644-7800 Washington, DC 20005
(202) 434-4660
Corporate Headquarters Headquarters of Subsidiary
First Shenango Bancorp, Inc. First Federal Savings Bank of New Castle
25 North Mill Street First Federal Plaza, 25 North Mill Street
New Castle, PA 16101 New Castle, PA 16101
(800) 982-8322 (724) 654-6605
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Branch Locations
of Subsidiary
Neshannock Township Union Township Shenango Township
3214 Wilmington Road Westgate Plaza Shenango Plaza
New Castle, PA 16105 2090 West State New Castle, PA 16101
(724) 658-8585 Street (724) 652-1142
New Castle, PA
16101
(724) 652-6651
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
First Shenango Bancorp, Inc. ("the Company"), has one wholly owned subsidiary,
First Federal Savings Bank of New Castle ("the Savings Bank"). The Savings Bank
is chartered under the laws of the United States of America. The Savings Bank
has one wholly owned subsidiary, Tri-State Service Corporation ("Tri-State").
Tri-State was indirectly acquired by the Company at the time the Company
acquired First Federal. Tri-State is a Pennsylvania-chartered corporation.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-70448) pertaining to the First Shenango Bancorp, Inc. 1993 Stock
Option Plan, First Federal Savings Bank of New Castle Management Stock Bonus
Plan, and First Federal Savings Bank of New Castle Directors Stock Bonus Plan of
First Shenango Bancorp, Inc. of our report dated February 6, 1998, with respect
to the consolidated financial statements of First Shenango Bancorp, Inc.
incorporated by reference in the Annual Report (Form 10-K) for the year ended
December 31, 1997.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
March 24, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM
THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,070
<INT-BEARING-DEPOSITS> 13,579
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 94,659
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 259,241
<ALLOWANCE> 3,235
<TOTAL-ASSETS> 374,972
<DEPOSITS> 275,221
<SHORT-TERM> 26,243
<LIABILITIES-OTHER> 4,164
<LONG-TERM> 21,482
0
0
<COMMON> 234
<OTHER-SE> 47,628
<TOTAL-LIABILITIES-AND-EQUITY> 374,972
<INTEREST-LOAN> 20,982
<INTEREST-INVEST> 7,968
<INTEREST-OTHER> 610
<INTEREST-TOTAL> 29,560
<INTEREST-DEPOSIT> 12,582
<INTEREST-EXPENSE> 4,380
<INTEREST-INCOME-NET> 12,598
<LOAN-LOSSES> 773
<SECURITIES-GAINS> (17)
<EXPENSE-OTHER> 5,835
<INCOME-PRETAX> 6,780
<INCOME-PRE-EXTRAORDINARY> 6,780
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,586
<EPS-PRIMARY> 2.31<F1>
<EPS-DILUTED> 2.24
<YIELD-ACTUAL> 3.47
<LOANS-NON> 2,773
<LOANS-PAST> 1
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,774
<ALLOWANCE-OPEN> 2,867
<CHARGE-OFFS> 447
<RECOVERIES> 42
<ALLOWANCE-CLOSE> 3,235
<ALLOWANCE-DOMESTIC> 3,235
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Basic earnings per share.
</FN>
</TABLE>
